Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected with their parents. The project requires an initial investment in plant and equipment of 6 million. This investment will be depreciated straight-line over five years to a book value of zero. But when the project comes to an end at the end of five years, the equipment will, in fact, be sold for 500,000. Wizmo believes that working capital at each date must be maintained at 10% of next year's forecasted sales, starting at time 0. For example, if the sales amount at time 1 equals 2 million, then the level of working capital at time 0 would be 0.2 million. Working capital is fully recovered at time 5. Production costs are estimated at 25% of sales. Sales forecasts (in millions) are as follows: Time Sales 0 0 1 2.0 2 3 4 5 2.4 4.0 4.0 2.4 The firm pays a tax rate of 25%, and the discount rate is 12%. What is the NPV of the project? b. Suppose the NPV of the project is paid out to Wizmo's shareholders as a lump sum dividend. Their shareholders also have the objective of improving the ESG impact of their investments and consider donating 50% of the NPV (as found in part a) to an initiative focusing on the reduction of electronic waste caused by short battery lifespans. Alternatively, the same impact could be achieved by Wizmo incorporating a higher-quality battery into the gadget. The use of a higher-quality battery would increase the production costs from 25% to 30% of sales. Holding everything else constant, who do you think should deliver on the ESG objective, Wizmo, or their shareholders? To answer this, please compare the NPV of the adjusted project to 50% of the initial project NPV. Aside: Part b of this question is meant to be a simplified NPV example within the current debate about enlightened shareholder value. Other differences could be incorporated, for example, different tax treatments of shareholder donations versus a firm changing their cost structure to improve on ESG ratings. Such differences are not being considered in the above example. Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected with their parents. The project requires an initial investment in plant and equipment of 6 million. This investment will be depreciated straight-line over five years to a book value of zero. But when the project comes to an end at the end of five years, the equipment will, in fact, be sold for 500,000. Wizmo believes that working capital at each date must be maintained at 10% of next year's forecasted sales, starting at time 0. For example, if the sales amount at time 1 equals 2 million, then the level of working capital at time 0 would be 0.2 million. Working capital is fully recovered at time 5. Production costs are estimated at 25% of sales. Sales forecasts (in millions) are as follows: Time Sales 0 0 1 2.0 2 3 4 5 2.4 4.0 4.0 2.4 The firm pays a tax rate of 25%, and the discount rate is 12%. What is the NPV of the project? b. Suppose the NPV of the project is paid out to Wizmo's shareholders as a lump sum dividend. Their shareholders also have the objective of improving the ESG impact of their investments and consider donating 50% of the NPV (as found in part a) to an initiative focusing on the reduction of electronic waste caused by short battery lifespans. Alternatively, the same impact could be achieved by Wizmo incorporating a higher-quality battery into the gadget. The use of a higher-quality battery would increase the production costs from 25% to 30% of sales. Holding everything else constant, who do you think should deliver on the ESG objective, Wizmo, or their shareholders? To answer this, please compare the NPV of the adjusted project to 50% of the initial project NPV. Aside: Part b of this question is meant to be a simplified NPV example within the current debate about enlightened shareholder value. Other differences could be incorporated, for example, different tax treatments of shareholder donations versus a firm changing their cost structure to improve on ESG ratings. Such differences are not being considered in the above example.
Expert Answer:
Related Book For
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
Posted Date:
Students also viewed these finance questions
-
Blogs, LinkedIn articles, and other online publications are channels of communication through which people can share their experiences, perspectives, and expertise directly with readersand readers...
-
After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated...
-
Coca Cola (KO) price is $61/share. The company is expected to pay dividend of $1.7/share next year. (In reality, dividends are paid quarterly. In this question we will assume for simplicity that all...
-
Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 in core deposits. a. Calculate the financing gap. b. What is the financing requirement? c. How can the financing gap...
-
What is the distinction between glass transition temperature and melting temperature?
-
- What roles do email marketing play in the Digital marketing strategy? - How do you maximize social media in a digital marketing strategy? - How does a digital marketing strategy create a compelling...
-
If 1.0 -in. metal Pall rings are used instead of 2.0 -in. rings in Example \(16-2\) : a. Recalculate flooding velocity and required diameter. b. Recalculate \(\mathrm{H}_{\mathrm{G}}\) and...
-
The Walt Disney Company has four profitable business segments, described as follows: Media Networks: The ABC television and radio network, Disney channel, ESPN, A& E, E!, and Disney.com. Parks and...
-
The mean for statistics test scores is 62 and the standard deviation is 7.0. For the biology test scores, the mean is 24 and the standard deviation is 3.7. The test scores of a student who took both...
-
The annual variable production costs for a plant operates at 70% capacity are $600,000 while the sum of the annual fixed charges, overheads costs, and general expenses is $300,000. 1- What is the...
-
1. What were the main strengths of the Soviet Union? What were the main weaknesses? Who exposed these weaknesses and to whom did he expose them? Was it economics or politics that led to the downfall...
-
Indigo Sdn. Bhd. (ISB) was founded in 1990. The company has more than 20 years of experience in the office furniture industry. ISB is one of the market leaders in the Malaysian furniture industry and...
-
Write a public instance (not static) method called testVal) in TestUtil.java that returns an int. This method must take a single String parameter. This method will possibly throw 3 Exceptions based...
-
In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over...
-
Mainline Produce Corporation acquired all the outstanding common stock of Iceberg Lettuce Corporation for $30,000,000 in cash. The book values and fair values of Iceberg's assets and liabilities were...
-
What is the nominal annual rate of interest compounded semi-annually at which $1093.00 will accumulate to 51663.67 in six years and six months?
-
APC16550D UART has a clock running at18.432 MHz and its baud rate is set to 2000.Determine the HEX contents of its DLM and DLL registers. Please can you explain step by step and in detail how you get...
-
Bernard Ruegel has drawn up a trial balance which is presented below. You have the following extra information: 1. Closing inventory is 13,206. 2. There are the following amounts owing: advertising...
-
Two partners, Peter Tom and Sheila Thumb, have the following details of their accounts for the year ended 31 December 2012. Required: Prepare the relevant income statement and statement of financial...
-
Discuss the view that the accounts of partnerships are much like those of sole traders except for the need to share out the equity and profi t between more than one partner.
Study smarter with the SolutionInn App