Question

A company is considering an investment of $4 million in a project that has a seven-year...

  1. A company is considering an investment of $4 million in a project that has a seven-year life. The company has estimated its discount rate at 12%. Details of the sales and costs associated with the project are as follows:

Sales volume

250,000 units per year

Sales price

$4 per unit

Costs

Direct materials (4 kg at $.40 per kg)

$1.60 per unit

Direct labor (0.1 hours at $8 per hour)

$0.80 per unit

Overhead

$330,000 per year

Note: The annual overhead includes $200,000 per year depreciation on the asset. It also includes apportioned fixed overhead of a further $50,000 per year.

  1. Calculate the net present value of the project. Provide a commentary on the discounting process and on the net present value that you calculated.
  2. Carry out a sensitivity analysis on the five variables of this project. Include the life of the project and the discount rate. Identify what you consider the most critical variable and advise management what they should do, if anything, before adopting the new project.
  3. Advise the company on whether it should proceed with the project and provide reasons for your advice.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company is considering an investment of $4 million in a project that has a seven-year...
A company is considering an investment of $4 million in a project that has a seven-year life. The company has estimated its discount rate at 12%. Details of the sales and costs associated with the project are as follows: Sales volume 250,000 units per year Sales price $4 per unit Costs Direct materials (4 kg at $.40 per kg) $1.60 per unit Direct labor (0.1 hours at $8 per hour) $0.80 per unit Overhead $330,000 per year Note: The annual...
Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating income in each of five years as follows: Sales $2,737,000 Variable expenses $1,001,000 Contribution margin $1,736,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $610,000 Depreciation $605,000 Total fixed expenses $1,215,000 Net operating income $521,000 4. What is the project's net...
Cardinal Company is considering a five-year project that would require a $2,855,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $2,855,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows: Sales $ 2,867,000 Variable expenses 1,125,000 Contribution margin 1,742,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 706,000 Depreciation 571,000 Total fixed expenses 1,277,000 Net operating income $ 465,000 Foundational 12-4 4....
Company "A" is investment project that will last 10 years. The initial investment is $25 million...
Company "A" is investment project that will last 10 years. The initial investment is $25 million for equipment, which will be depreciated for tax purposes at the beginning of the project, when the equipment is purchased (Year 0). The equipment is expected to have no value at the end of the project. Estimates for year 1 - 10 are sales price of $10 per unit and variable costs $5 per unit. Sales quantity is expected to grow by 5% per...
  We are evaluating a project that costs $1,582,000, has a seven-year life, and has no salvage...
  We are evaluating a project that costs $1,582,000, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 87,100 units per year. Price per unit is $34.30, variable cost per unit is $20.55, and fixed costs are $751,000 per year. The tax rate is 30 percent, and we require a return of 12 percent on this project. What is the sensitivity of OCF to...
A project under consideration costs $200,000, has a five-year life and has no salvage value. Depreciation...
A project under consideration costs $200,000, has a five-year life and has no salvage value. Depreciation is straight-line to zero. The firm has made the following projections related to this project: Base Case Lower Bound Upper Bound Unit Sales 2,000 1,800 2,200 Price Per Unit $400 $360 $440 Variable Cost Per Unit $200 $180 $220 Fixed Costs $300,000 $270,000 $330,000 The required return is 15 percent and the tax rate is 21 percent. No additional investment in net working capital...
Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating income in each of five years as follows: Sales $2,737,000 Variable expenses $1,001,000 Contribution margin $1,736,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $610,000 Depreciation $605,000 Total fixed expenses $1,215,000 Net operating income $521,000 5. What is the project profitability...
Cardinal Company is considering a five-year project that would require a $2,850,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $2,850,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows: Sales $ 2,857,000 Variable expenses 1,011,000 Contribution margin 1,846,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 799,000 Depreciation 570,000 Total fixed expenses 1,369,000 Net operating income $ 477,000 Click here to...
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with...
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 16%. The project would provide net operating income in each of five years as follows: Sales $ 2,863,000 Variable expenses 1,014,000 Contribution margin 1,849,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 781,000 Depreciation 583,000 Total fixed expenses 1,364,000 Net operating income $ 485,000 Click here to...
Cardinal Company is considering a project that would require a $2,875,000 investment in equipment with a...
Cardinal Company is considering a project that would require a $2,875,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $300,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:      Sales $ 2,871,000   Variable expenses 1,018,000   Contribution margin 1,853,000   Fixed expenses:   Advertising, salaries, and other     fixed out-of-pocket costs $...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT