Kingbird Company is considering the purchase of a new machine. The invoice price of the machine is $127,000, freight charges are estimated to be $3,100, and installation costs are expected to be $5,200. The salvage value of the new equipment is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the company does not purchase the new machine. At that time, the equipment's salvage value would be zero. If the company purchases the new machine now, it would have to scrap the existing machine. Kingbird's accountant, Donald Robinson, has accumulated the following data regarding annual sales and expenses with and without the new machine: 1. Without the new machine, Kingbird can sell 10,400 units of product annually at a per-unit selling price of $100. With the new machine, the number of units produced and sold would increase by 25%, and the selling price would remain the same. 2. The new machine is faster than the old machine, and it is more efficient in its use of materials. With the old machine, the gross profit rate is 28.50% of sales, whereas the rate will be 30% of sales with the new machine. 3. Annual selling expenses are $166,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. 4. Annual administrative expenses are expected to be $104,000 with the old machine, and $116,000 with the new machine. 5. The current book value of the existing machine is $42,000. Kingbird uses straight-line depreciation. 6. Kingbird management has a required rate of return of 15% on its investments and a payback period of no more than 3 years. (a) Calculate the annual rate of return for the new machine. (Round calculations in percentages to 2 decimal places, e.g. 15.25% and final answer to 1 decimal place, e.g. 15.2%). Annual rate of return %
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Luang Company is considering the purchase of a new machine. Its invoice price is $122,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. The salvage value of the new machine is expected to be zero after a useful life of 4 years. The existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Luang's accountant, Lisa Hsung, has accumulated the following data regarding annual sales and expenses with and without the new machine: 1. Without the new machine, Luang can sell 10,000 units of product annually at a per unit selling price of $100. If the new unit is purchased, the number of units produced and sold would increase by 25%, and the selling price would remain the same. 2. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine, the gross profit rate will be 28.5% of sales, whereas the rate will be 30% of sales with the new machine. (Note: These gross profit rates do not include depreciation on the machines. For purposes of determining net income, treat depreciation expense as a separate line item.) 3. Annual selling expenses are $160,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. 4. Annual administrative expenses are expected to be $100,000 with the old machine and $112,000 with the new machine. 5. The current book value of the existing machine is $40,000. Luang uses straight-line depreciation. 6. Luang's management has a required rate of return of 15% on its investment and a cash payback period of no more than 3 years. Answer the following. (Ignore income tax effects.)
Akash M.
Luang Company is considering the purchase of a new machine. Its invoice price is $122,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. The salvage value of the new machine is expected to be zero after a useful life of 4 years. The existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Luang's accountant, Lisa Hsung, has accumulated the following data regarding annual sales and expenses with and without the new machine. 1. Without the new machine, Luang can sell 10,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 25%, and the selling price would remain the same. 2. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine, the gross profit rate will be 28.5% of sales, whereas the rate will be 30% of sales with the new machine. (Note: These gross profit rates do not include depreciation on the machines. For purposes of determining net income, treat depreciation expense as a separate line item.) 3. Annual selling expenses are $160,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. 4. Annual administrative expenses are expected to be $100,000 with the old machine and $112,000 with the new machine. 5. The current book value of the existing machine is $40,000. Luang uses straight-line depreciation. 6. Luang's management has a required rate of return of 15% on its investment and a cash payback period of no more than 3 years. Answer the following. (Ignore income tax effects.)
The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Furthermore, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12% of sales revenue. The firm's tax rate is 25%, and its overall weighted average cost of capital, which is risk-adjusted cost of capital for an average project is 10%. a. Assume the plant space could be leased out to another firm for $25,000 per year. b. Assume that the new line would decrease sales of the firm's other products by $50,000 per year and the cost of goods sold for those products would have been $25,000. c. Please find the NPV, IRR, MIRR, PI, payback period and discounted payback period for this project. d. Perform a sensitivity analysis on the cost per unit, unit sales, and salvage value. Assume changes of 10%, 20%, and 30% and include a graph and discuss your results. e. Assume that Bill Morse is confident in all of the variables except unit sales and sales price. Here is what he thinks: If product acceptance is poor only 800 units would be sold per year and unit price would dip to $160; if there is a strong response to this product unit sales could rise to 1200 and price increase to $240 per unit. Bill believes the probabilities associated with these scenarios are a 25% chance of poor acceptance, 50% chance the original base case would happen and a 25% of the strong response. Please perform a Scenario Analysis for this project. i. What are the NPVs for Poor, Base and Strong cases? ii. What is the expected NPV? iii. What is the standard deviation of NPV? iv. What is the coefficient of variation for this project? f. Assume the company's coefficient of variation for an average project is in the range of 0.2 to 0.4, how would you classify the risk of this project? Low? Average? High? i. If Arsenault normally adjusts WACC by 3% to adjust for risk. What is the appropriate WACC for this project and what is the risk adjusted NPV? g. Should Arsenault accept this project?
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