Problem (10 points) Virginia Glassworks is considering adding a new product line. The new product line would consist of glass Christmas ornaments and would require the attached investment, The production and marketing equipment, as well as the displays, would have an expected life of ten years. All equipment and displays would be depreciated over the ten year life using the 200% declining balance method with no salvage value used. At the end of the ten years, it is expected that the equipment and displays could be sold for a total of $10,000. In addition, the working capital will be returned at the end of the ten years. Attached are the expected operating cash revenues and cash expenses by year for the proposed product line The company's tax rate is 35 percent and its cost of capital is 10 percent. Management expects all investments to pay back their initial investment within seven years. REQUIRED: (1) Compute the net present value (NPV) for the proposed investment on an after tax basis. Round all calculations to the nearest whole dollar. (2) Compute the cash payback period for the proposed investment on an after tax basis. Round your answer to two decimal places. Should the investment be made? Explain your answer. WYOMING CORP. DATA FOR PREPARATION OF STATEMENT OF CASH FLOWS FROM OPERATING ACTIVITIES FOR CURRENT YEAR CASE 1 CASE 2 Net Income For Current Year $ 3,000 300) Gain (Loss) on Sale of Equipment (included in net income figure above) 0 500 Dividends Paid 5.000 10.000 Increase (Decrease) in Cash 2.000 5,000) Increase (Decrease) in Accounts Receivable 4,000) 6,000 Increase (Decrease) in Inventory 10,000 15.000 Increase (Deercase) in Buildings (all due to purchases) 100,000 50,000 Increase (Decrease) in Equipment (all due to purchases/sales of equipment) 10,000 5.000) Increase (Decrease) in Accumulated Depreciation, Buildings (all due to depreciation expense) 12.000 8,000 Increase (Decrease) in Accumulated Depreciation, Equipment 2.500 (CASE 1: all due to depreciation expense) (CASE 2: S500 decrease due to sale of equipment, 1,500 remainder of change due to depreciation expense) Increase (Decrease) in Accounts Payable 4,000) 3,000 Increase (Decrease) in Short Term Notes Payable (consider this an operating activity) 2,500) 5.000) Increase (Decrease) in Wages Payable 1.000 700) Increase (Decrease) in Long Term Notes Payable 10.000 20,000) Increase (Decrease) in Bonds Payable 100,000 Increase (Decrease) in Common Stock 0 10,000 Increase (Decrease) in Additional Paid In Capital 0 70.000 0 Problem (10 points) Virginia Glassworks is considering adding a new product line. The new product line would consist of glass Christmas ornaments and would require the attached investment, The production and marketing equipment, as well as the displays, would have an expected life of ten years. All equipment and displays would be depreciated over the ten year life using the 200% declining balance method with no salvage value used. At the end of the ten years, it is expected that the equipment and displays could be sold for a total of $10,000. In addition, the working capital will be returned at the end of the ten years. Attached are the expected operating cash revenues and cash expenses by year for the proposed product line The company's tax rate is 35 percent and its cost of capital is 10 percent. Management expects all investments to pay back their initial investment within seven years. REQUIRED: (1) Compute the net present value (NPV) for the proposed investment on an after tax basis. Round all calculations to the nearest whole dollar. (2) Compute the cash payback period for the proposed investment on an after tax basis. Round your answer to two decimal places. Should the investment be made? Explain your answer. WYOMING CORP. DATA FOR PREPARATION OF STATEMENT OF CASH FLOWS FROM OPERATING ACTIVITIES FOR CURRENT YEAR CASE 1 CASE 2 Net Income For Current Year $ 3,000 300) Gain (Loss) on Sale of Equipment (included in net income figure above) 0 500 Dividends Paid 5.000 10.000 Increase (Decrease) in Cash 2.000 5,000) Increase (Decrease) in Accounts Receivable 4,000) 6,000 Increase (Decrease) in Inventory 10,000 15.000 Increase (Deercase) in Buildings (all due to purchases) 100,000 50,000 Increase (Decrease) in Equipment (all due to purchases/sales of equipment) 10,000 5.000) Increase (Decrease) in Accumulated Depreciation, Buildings (all due to depreciation expense) 12.000 8,000 Increase (Decrease) in Accumulated Depreciation, Equipment 2.500 (CASE 1: all due to depreciation expense) (CASE 2: S500 decrease due to sale of equipment, 1,500 remainder of change due to depreciation expense) Increase (Decrease) in Accounts Payable 4,000) 3,000 Increase (Decrease) in Short Term Notes Payable (consider this an operating activity) 2,500) 5.000) Increase (Decrease) in Wages Payable 1.000 700) Increase (Decrease) in Long Term Notes Payable 10.000 20,000) Increase (Decrease) in Bonds Payable 100,000 Increase (Decrease) in Common Stock 0 10,000 Increase (Decrease) in Additional Paid In Capital 0 70.000 0