time value of money
Project Description:
i need help solving some basic time value money problems. below is the problem background information, after that will be the problems that need to be solved. i need this done within the next 24 hours. the sooner the better. thanks!
teddy bear company makes one type of teddy bear. at the beginning of year 3, the following projected information is provided for year 3 with respect to the company's product line:
net sales are $2,200,000, at $100 per unit
variable costs are $1,300,000
contribution margin is 900,000
fixed costs are 400,000
income before income tax expense is 500,000
income tax expense at 35% rate is 175,000
net income is 325,000
teddy bear company is considering buying new equipment (investment a) effective january 1, year 2. information regarding the equipment is as follows:
cost $ 700,000
estimated useful life 10 years
salvage value $ 140,000
management estimates that the installation of this equipment would result in savings of 45% with respect to energy costs in years 1 through 5 and 60% in years 6 through 10. those costs (included in variable manufacturing costs above) currently run $100,000 per year. the equipment would have no other beneficial effect in terms of improving manufacturing capacity or the quality of the product. if the new equipment is purchased and installed, management believes that the current equipment can be scrapped for $200,000. the current equipment was purchased for $500,000 with an estimated useful life of 12 years, and was put into service at the beginning of year 1. teddy bear company depreciates all equipment using the straight line method (depreciation expense is included in the fixed manufacturing costs above).
the alternative (investment b) for teddy bear company is to continue using the old equipment (with a remaining estimated useful life of 10 years and a salvage value of $40,000) and invest the $700,000 into a safe (riskfree) investment account that pays 6% interest, compounded annually. tax would only be paid once on total earnings at the of 10 yearss, and the entire $700,000 investment would be returned (along with earnings).
additional assumptions that are made include the following:
* in years 1 and 2 (the first two of operations), all amounts given above were the same as projected for year 3 (net sales, variable manufacturing costs, etc.).
* over the next ten years, management expects the number of units sold and the price per unit sold to increase 3% and 5%, respectively, on an annual basis (effective january 1 of each year).
* management expects all variable costs to increase 6% annually (effective january 1 of each year).
* due to innovative practices, management believes that fixed manufacturing costs will remain the same across the 10 year period.
* the tax rate is expected to remain 35%.
* given the inherent risk and uncertainty of the potential investment in new equipment, management assumes a discount rate of 10% for that project.
* assume cash inflows for calculating normal payback period occur evenly throughout year; cash inflows for discounted payback period and net present value calculations occur at end of year.
please show work for the following questions. i know this was alot of background info, but these questions should be fairly easy to plug the info into.
1) calculate the payback period for investment a.
2) calculated the discounted payback period for investment a.
3) calculate the accounting rate of return (aar) for investment a.
4) calculate the net present value and profitability index for investment a.
5) calculate the net present value and profitability index for investment b.
5) given the information above, which investment option should teddy bear company chose and why?
teddy bear company makes one type of teddy bear. at the beginning of year 3, the following projected information is provided for year 3 with respect to the company's product line:
net sales are $2,200,000, at $100 per unit
variable costs are $1,300,000
contribution margin is 900,000
fixed costs are 400,000
income before income tax expense is 500,000
income tax expense at 35% rate is 175,000
net income is 325,000
teddy bear company is considering buying new equipment (investment a) effective january 1, year 2. information regarding the equipment is as follows:
cost $ 700,000
estimated useful life 10 years
salvage value $ 140,000
management estimates that the installation of this equipment would result in savings of 45% with respect to energy costs in years 1 through 5 and 60% in years 6 through 10. those costs (included in variable manufacturing costs above) currently run $100,000 per year. the equipment would have no other beneficial effect in terms of improving manufacturing capacity or the quality of the product. if the new equipment is purchased and installed, management believes that the current equipment can be scrapped for $200,000. the current equipment was purchased for $500,000 with an estimated useful life of 12 years, and was put into service at the beginning of year 1. teddy bear company depreciates all equipment using the straight line method (depreciation expense is included in the fixed manufacturing costs above).
the alternative (investment b) for teddy bear company is to continue using the old equipment (with a remaining estimated useful life of 10 years and a salvage value of $40,000) and invest the $700,000 into a safe (riskfree) investment account that pays 6% interest, compounded annually. tax would only be paid once on total earnings at the of 10 yearss, and the entire $700,000 investment would be returned (along with earnings).
additional assumptions that are made include the following:
* in years 1 and 2 (the first two of operations), all amounts given above were the same as projected for year 3 (net sales, variable manufacturing costs, etc.).
* over the next ten years, management expects the number of units sold and the price per unit sold to increase 3% and 5%, respectively, on an annual basis (effective january 1 of each year).
* management expects all variable costs to increase 6% annually (effective january 1 of each year).
* due to innovative practices, management believes that fixed manufacturing costs will remain the same across the 10 year period.
* the tax rate is expected to remain 35%.
* given the inherent risk and uncertainty of the potential investment in new equipment, management assumes a discount rate of 10% for that project.
* assume cash inflows for calculating normal payback period occur evenly throughout year; cash inflows for discounted payback period and net present value calculations occur at end of year.
please show work for the following questions. i know this was alot of background info, but these questions should be fairly easy to plug the info into.
1) calculate the payback period for investment a.
2) calculated the discounted payback period for investment a.
3) calculate the accounting rate of return (aar) for investment a.
4) calculate the net present value and profitability index for investment a.
5) calculate the net present value and profitability index for investment b.
5) given the information above, which investment option should teddy bear company chose and why?
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