RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to sell a new line of medium- priced stoves. Sales revenues for the new line of stoves are estimated at $600 a year. Variable costs are 60% of sales. The project is expected to last 10 years. Also, non - variable costs are $200 per year. The company has spent $100 in research and a marketing study that determined the company will have synergy gains/sales of $200 a year from sales of its existing high-priced stoves. The production variable cost of these sales is $100 a year. The plant and equipment required for producing the new line of stoves costs $300 and will be depreciated down to zero over 30 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $50 at the end of 10 years. The new stoves will also require today an increase in net working capital of $20 that will be returned at the end of the project. The tax rate is 20 percent and the cost of capital is 10%.
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- Nico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. What are the total life-cycle profits now projected for the new product? d. Describe the three general approaches that Nico can take to reduce the projected cost to this new target. Of the three approaches, which is likely to produce the most reduction? 3. Suppose that the Engineering Department has two new designs: Design A and Design B. Both designs eliminate the two nonvalued features. Both designs also reduce production and logistics costs by an additional 8 per unit. Design A, however, leaves post-purchase costs at 10 per unit, while Design B reduces post-purchase costs to 4 per unit. Developing and testing Design A costs an additional 150,000, while Design B costs an additional 300,000. Assuming a price of 125, calculate the total life-cycle profits under each design. Which would you choose? Explain. What if the design you chose cost an additional 500,000 instead of 150,000 or 300,000? Would this have changed your decision? 4. Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? What does this say about the importance of knowing the linkages between preproduction activities and later activities?Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.
- Shelby Industries has a capacity to produce 45.000 oak shelves per year and is currently selling 40,000 shelves for $32 each. Martin Hardwoods has approached Shelby about buying 1,200 shelves for a new project and is willing to pay $26 each. The shelves can be packaged in bulk; this saves Shelby $1.50 per shelf compared to the normal packaging cost. Shelves have a unit variable cost of $27 with fixed costs of $350,000. Because the shelves dont require packaging, the unit variable costs for the special order will drop from $27 per shelf to $25.50 per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum price per shelf that Shelby should accept for this special order?Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.Stanton Inc. is considering adding a new product line (the product code is XYZ). The company has spent total of $150,000 so far for research and development for this product, and just paid another $50,000 to a consulting firm to do the marketing research. The consulting firm has estimated that the product will have a very short life of only 3 years. It has also estimated that the annual sales volume will be 50,000 units and the selling price is $50 per unit. Further it has predicted that the sales volume of a current product will drop by 10,000 units because XYZ can substitute the current product. The selling price for the current product is $35 per unit. The Production Department of Stanton has calculated that it needs a new machine for XYZ production. The total costs, including installation and shipping, for the machine are $1,000,000. Stanton uses the MACRS method to depreciate all of its assets (see depreciation rates in the table below), and it expects that the machine will last 5…
- McGilla Golf has decided to sell a new line of golf clubs and 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 $810 per set and have a variable cost of $410 per set. The company has spent $151,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,600 sets of its high-priced clubs. The high-priced clubs sell at $1,110 and have variable costs of $710. The company will also increase sales of its cheap clubs by 11,100 sets. The cheap clubs sell for $450 and have variable costs of $235 per set. The fixed costs each year will be $9,110,000. The company has also spent $1,120,000 on research and development for the new clubs. The plant and equipment required will cost $28,770,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net…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 $825 per set and have a variable cost of $385 per set. The company has spent $260,000 for a marketing study that determined the company will sell 68,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,200 sets of its high-priced clubs. The high-priced clubs sell at $1,195 and have variable costs of $655. The company will also increase sales of its cheap clubs by 14,200 sets. The cheap clubs sell for $415 and have variable costs of $205 per set. The fixed costs each year will be $10,350,000. The company has also spent $2,100,000 on research and development for the new clubs. The plant and equipment required will cost $38,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an…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 $825 per set and have a variable cost of $385 per set. The company has spent $260,000 for a marketing study that determined the company will sell 68,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,200 sets of its high-priced clubs. The high-priced clubs sell at $1,195 and have variable costs of $655. The company will also increase sales of its cheap clubs by 14,200 sets. The cheap clubs sell for $415 and have variable costs of $205 per set. The fixed costs each year will be $10,350,000. The company has also spent $2,100,000 on research and development for the new clubs. The plant and equipment required will cost $38,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an…
- Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $170,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $885,000 per year. The fixed costs associated with this will be $224,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $950,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 25 percent and a required return of 14 percent. a. Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,…Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $121,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $576,000 per year. The fixed costs associated with this will be $180,000 per year, and variable costs will amount to 21 percent of sales. The equipment necessary for production of the Potato Pet will cost $622,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 35 percent and a required return of 14 percent. Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places,…Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $175,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $890,000 per year. The fixed costs associated with this will be $226,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $960,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 21 percent and a required return of 15 percent. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal…