Q2 V3 The Giuliani Company (TGC) manufactures paper shredder products. The company is considering the purchase of a new machine that will allow the company to produce a new high-speed paper shredder. Last year, the company spent $1,750,000 on a marketing study which concluded that entering this market would be attractive. The cost of the machine is $ 20,000,000. The machine will be depreciated over 10 years to a zero-salvage value. However, the company intends to use the machine for only 5 years. Management thinks that the sale price of the machine at the end of 5 years will be $8,000,000. The machine can produce 350,000 shredders annually. The marketing director of TGC believes if the company will spend $450,000 on advertising in the first year and another $325,000 in each of the following years for national advertising, the company will be able to sell 300,000 shredders at $195.00 each for the national market. The cost of producing the shredders is $165.00, and the other costs related to the new product are $1,250,000 annually, TGC's cost of capital is 18% and the corporate tax rate is 35%. (Assume straight line depreciation and round to 2 decimal places.) 1. What is the capital gain/loss from selling the machine after 5 years? (1 mark) 2. What is the NPV of the project if the marketing director's projections are correct? (8 marks) 3. What is the minimum price the company should charge for each shedder if the project is to be profitable (i.e. minimum $0 NPV)? Assume the price of the shedder does not affect sales. (2 marks) 4. The TGC Finance Vice President suggested cancelling the advertising campaign. In his opinion, the company's sales will not be reduced significantly due to the cancellation. What is the minimum quantity the company needs to sell in order to be profitable if the Vice President's suggestion is accepted? (2 marks) 5. The Marketing Vice President would like some sensitivity analysis done. He asks: "What would the NPV of the project be if annual unit sales were 100,000, 150,000, 200,000, 250,000, 300,000, and 350,000 and if the unit price of the shedders varies from $170, $175 $180, $185, $190 and $195. Show the Data Table that answers this question. (2 marks) 6. Presentation (5 marks) Q2 V3 The Giuliani Company (TGC) manufactures paper shredder products. The company is considering the purchase of a new machine that will allow the company to produce a new high-speed paper shredder. Last year, the company spent $1,750,000 on a marketing study which concluded that entering this market would be attractive. The cost of the machine is $ 20,000,000. The machine will be depreciated over 10 years to a zero-salvage value. However, the company intends to use the machine for only 5 years. Management thinks that the sale price of the machine at the end of 5 years will be $8,000,000. The machine can produce 350,000 shredders annually. The marketing director of TGC believes if the company will spend $450,000 on advertising in the first year and another $325,000 in each of the following years for national advertising, the company will be able to sell 300,000 shredders at $195.00 each for the national market. The cost of producing the shredders is $165.00, and the other costs related to the new product are $1,250,000 annually, TGC's cost of capital is 18% and the corporate tax rate is 35%. (Assume straight line depreciation and round to 2 decimal places.) 1. What is the capital gain/loss from selling the machine after 5 years? (1 mark) 2. What is the NPV of the project if the marketing director's projections are correct? (8 marks) 3. What is the minimum price the company should charge for each shedder if the project is to be profitable (i.e. minimum $0 NPV)? Assume the price of the shedder does not affect sales. (2 marks) 4. The TGC Finance Vice President suggested cancelling the advertising campaign. In his opinion, the company's sales will not be reduced significantly due to the cancellation. What is the minimum quantity the company needs to sell in order to be profitable if the Vice President's suggestion is accepted? (2 marks) 5. The Marketing Vice President would like some sensitivity analysis done. He asks: "What would the NPV of the project be if annual unit sales were 100,000, 150,000, 200,000, 250,000, 300,000, and 350,000 and if the unit price of the shedders varies from $170, $175 $180, $185, $190 and $195. Show the Data Table that answers this question. (2 marks) 6. Presentation
