Question

J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,500, including a set of eight chairs. The company feels that sales will be 1,950, 2,100, 2,650, 2,500, and 2,250 sets per year for the next five years, respectively. Variable costs will amount to 48 percent of sales, and fixed costs are $1.93 million per year. The new dining room table sets will require inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 400 dining room table sets per year of the oak tables the company produces. These tables sell for $4,800 and have variable costs of 43 percent of sales. The inventory for this oak table is also 6 percent of sales. The company believes that sales of the oak table will be discontinued after three years. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $16 million. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $16 million in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3.4 million if purchased today, and $6.6 million if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 40 percent, and the required return for the project is 10 percent.

Calculate the NPV of the new table. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)

Answer #1

year | 0 | 1 | 2 | 3 | 4 | 5 |

$000 | $000 | $000 | $000 | $000 | $000 | |

sales | 14625 | 15750 | 19875 | 18750 | 16875 | |

variable cost | 7020 | 7560 | 9540 | 9000 | 8100 | |

contribution | 7605 | 8190 | 10335 | 9750 | 8775 | |

fixed cost | 1930 | 1930 | 1930 | 1930 | 1930 | |

before tax cash flow | 5675 | 6260 | 8405 | 7820 | 6845 | |

after tax cash flow ie 60%of cash flow(40%is tax) | 3405 | 3765 | 5043 | 4692 | 4107 | |

loss of sale of oak | (3283.2) | |||||

additional working capital at year 3 for machine | (9400) | |||||

cash flow | (3283.2) | 3405 | 3765 | 4357 | 4692 | 4107 |

discount at 10% | 1 | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 |

present value | (3283.2) | 3092.145 | 3109.89 | (3272.107) | 3204.636 | 2550.447 |

npv | 5404.811 |

so NPV is positive

J. Smythe, Inc., manufactures fine furniture. The company is
deciding whether to introduce a new mahogany dining room table set.
The set will sell for $8,000, including a set of eight chairs. The
company feels that sales will be 2,450, 2,600, 3,150, 3,000, and
2,750 sets per year for the next five years, respectively. Variable
costs will amount to 47 percent of sales and fixed costs are $1.98
million per year. The new dining room table sets will require
inventory...

J. Smythe, Inc., manufactures fine furniture. The company is
deciding whether to introduce a new mahogany dining room table set.
The set will sell for $7,100, including a set of eight chairs. The
company feels that sales will be 2,800, 2,950, 3,500, 3,350, and
3,100 sets per year for the next five years, respectively. Variable
costs will amount to 50 percent of sales, and fixed costs are $1.89
million per year. The new tables will require inventory amounting
to 15...

The Modern Mission Woodworking company has decided to offer a
new line of custom dining room sets (tables with chairs). They
require special wood working equipment that would cost $125,000.
Further, this product line will be sold for only seven years with
an anticipated 15% return on any capital investment (meaning large
initial investments are amortized). This means the purchase of the
new equipment will be amortized to establish the target sales/yr
that will help the company make the 15%...

Fincal Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $120. The company feels that sales will be 13,000,
13,000, 14,000, 14,000, 15,000 and 12,500 units per year for the
next 6 years. Variable costs will be 30% of sales, and fixed costs
are $200,000 per year. The firm hired a marketing team to analyze
the viability of the product and the marketing analysis cost
$2,000,000. The company plans to...

ABCD Inc. manufactures financial calculators. The company is
deciding whether to introduce a new calculator. This calculator
will sell for $100. The company feels that sales will be 12,500,
13,000, 14,000, 13,200, and 12,500 units per year for the next 5
years. Variable costs will be 25% of sales, and fixed costs are
$300,000 per year. The firm hired a marketing team to analyze the
viability of the product and the marketing analysis cost
$1,500,000. The company plans to use...

Wet for the Summer, Inc., manufactures filters for swimming
pools. The company is deciding whether to implement a new
technology in its pool filters. One year from now the company will
know whether the new technology is accepted in the market. If the
demand for the new filters is high, the present value of the cash
flows in one year will be $14.4 million. Conversely, if the demand
is low, the value of the cash flows in one year will...

Maxwell Company manufactures furniture and recently adopted lean
accounting. Maxwell has two value streams: chairs and tables, which
had total sales of $245 and $310 million, respectively.
Chairs
Tables
Materials
$16,500
$14,500
Labor
123,000
96,500
Equipment related costs
44,500
62,800
Occupancy costs
11,350
12,600
Maxwell had other manufacturing costs of $116,750,000 and
SG&A costs of $25 million that were not traceable. The fixed
cost of prior period inventory included in the current income
statement is $5.5 million for the chair...

A construction company is deciding whether to build a road or a
building at a new township site. The road will cost $50 million to
build in 2019 and will require a re-construction every 5 years of
the road’s operation at the cost of $10 million. The annual
maintenance costs of the road are $5 million per year for the first
ten years of the road’s operation and $7 million per year
thereafter. The building will cost $100 million to...

McGilla Golf has decided to sell a new line of golf clubs. The
company would like to know the sensitivity of NPV to changes in the
price of the new clubs and the quantity of new clubs sold. The
clubs will sell for $780 per set and have a variable cost of $340
per set. The company has spent $170,000 for a marketing study that
determined the company will sell 62,000 sets per year for seven
years. The marketing study...

RET Inc. currently has one product, low-priced stoves. RET
Inc. has decided to sell a new line of medium-priced
stoves. Sales revenues for the new line of stoves are estimated at
$50 million a year. Variable costs are 60% of sales. The
project is expected to last 10 years. Also, non-variable costs are
$10,000,000 per year. The company has spent $4,000,000 in research
and a marketing study that determined the company will lose
(cannibalization) $10 million in sales a year of its...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 23 minutes ago

asked 43 minutes ago

asked 49 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago