Answered step by step
Verified Expert Solution
Question
1 Approved Answer
please include calculator keystrokes or formulas 8. The Boring Company makes sleep devices that simulate listening to college lectures on droll subjects. Boring just spent
please include calculator keystrokes or formulas
8. The Boring Company makes sleep devices that simulate listening to college lectures on droll subjects. Boring just spent $1 million to bring its plant into compliance with earthquake codes and another $500,000 hiring a consultant to help it develop more stimulating products. It can now spend an additional $10 million for equipment that will allow it to make a new range of alarm clocks which it thinks will be a big seller for the next 5 years. In deciding whether to make these alarm clocks, The Boring Company uses a discount rate of 10%. The Boring Company has an annual interest expense of $300,000. The Boring Company's tax rate is 35 percent. The $10 million in equipment will be straight line depreciated to a salvage value of zero over 5 years. The Boring Company actually expects the equipment to be worth $1 million at the end of 5 years. If Boring goes ahead with the project, it will immediately need an additional $2 million for an increase in the net working capital that it needs to make these alarm clocks but expects that it can reduce the working capital by $1 million after the first year of production. Boring expects to sell 1 million alarm clocks each year for 5 years at which point the project will come to an end. Each alarm clock costs $1.00 to make and will be sold for $3.00. Should they go ahead with the alarm clock project? (20 points) 8. The Boring Company makes sleep devices that simulate listening to college lectures on droll subjects. Boring just spent $1 million to bring its plant into compliance with earthquake codes and another $500,000 hiring a consultant to help it develop more stimulating products. It can now spend an additional $10 million for equipment that will allow it to make a new range of alarm clocks which it thinks will be a big seller for the next 5 years. In deciding whether to make these alarm clocks, The Boring Company uses a discount rate of 10%. The Boring Company has an annual interest expense of $300,000. The Boring Company's tax rate is 35 percent. The $10 million in equipment will be straight line depreciated to a salvage value of zero over 5 years. The Boring Company actually expects the equipment to be worth $1 million at the end of 5 years. If Boring goes ahead with the project, it will immediately need an additional $2 million for an increase in the net working capital that it needs to make these alarm clocks but expects that it can reduce the working capital by $1 million after the first year of production. Boring expects to sell 1 million alarm clocks each year for 5 years at which point the project will come to an end. Each alarm clock costs $1.00 to make and will be sold for $3.00. Should they go ahead with the alarm clock project? (20 points)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started