Comfort Footwear Inc. is considering whether to add a new line of running shoes to be sold
Question:
For tax purposes, the machines qualify for a capital cost allowance rate of 25%, declining balance. Manufacturing costs are deductible for tax purposes in the year when the related goods are sold. The company uses the first-in, first-out inventory method for accounting purposes. Marketing, distribution, and customer-service costs are deductible for tax purposes in the year when they are incurred. Assume a 40% marginal tax rate. Also, assume that all operating cash flows and income tax payments occur at the end of the year. The after-tax nominal required rate of return is 16%.
Variable marketing, distribution, and customer-service costs are estimated at $3.60 per unit and are not expected to change over the four-year period. The selling-price data and all cost estimates are expressed in nominal dollars. Accounts receivable and current liabilities are expected to be minimal.
Absorption costing must be used for tax purposes. Amortization is allocated on the basis of the estimates of the units produced each year.
REQUIRED
1. Prepare a schedule of relevant cash flows, including income taxes, for each year.
2. Compute the net present value of adding the new line of running shoes.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Step by Step Answer:
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ