After conducting a market research that cost $15,000, Book Printing Company (BPC) is considering the purchase...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
After conducting a market research that cost $15,000, Book Printing Company (BPC) is considering the purchase of a new printing machine which will allow them to print signage and posters. The machine will cost $440,000 and BPC will need to spend another $10,000 to install the machine. BPC will fully finance the purchase with a four year interest only loan from NAB that charges 8.75% per annum, with the principal repaid at the end of 4 years. BPC will install the printing machine in an existing building, which is currently being rented out for $30,000 a year under a 10 year lease agreement signed 6 years ago. The next lease payment is due at the end of one year. Under the lease agreement, BPC can cancel the lease today by paying the tenant compensation equal to one year's rental payment plus 10%, but this amount is not deductible for income tax purposes. The new printing machine will increase BPC's revenue by $250,000 per year but the variable costs will also increase by $45,000 per year. The machine will be depreciated on a straight-line basis to zero salvage value over the 4 years life of the project. BPC believes it can sell the machine at the end of 4 years for $20,000. The company will require additions to current assets of $35,000 at the beginning of the project, which will be fully recoverable at the end of the fourth year. BCP's required payback is 3 years and required rate of return is 12%. The company tax rate is 30%. As a financial manager of the company, you're conducting a capital budgeting analysis of this project. a. Calculate the incremental cash flows for each year (Yo to Ya inclusive). (15 marks) b. Calculate the payback period of the project. (Show answer correct to two decimal places.) (3 marks) c. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project. (Show answer correct to the nearer cent.) (5 marks) d. Calculate the present value index of the project. (Show answer correct to four decimal places.) (2 marks) e. Calculate the discounted payback period of the project. (Show answer correct to two decimal places) (4 marks) f. Calculate the intemal rate of return of the project using trial & error and interpolation' method. (Show answer correct to four decimal places) (6 marks) g. Explain under each criteria (that you calculated above) and overall if the company should accept this project or not. (5 marks) After conducting a market research that cost $15,000, Book Printing Company (BPC) is considering the purchase of a new printing machine which will allow them to print signage and posters. The machine will cost $440,000 and BPC will need to spend another $10,000 to install the machine. BPC will fully finance the purchase with a four year interest only loan from NAB that charges 8.75% per annum, with the principal repaid at the end of 4 years. BPC will install the printing machine in an existing building, which is currently being rented out for $30,000 a year under a 10 year lease agreement signed 6 years ago. The next lease payment is due at the end of one year. Under the lease agreement, BPC can cancel the lease today by paying the tenant compensation equal to one year's rental payment plus 10%, but this amount is not deductible for income tax purposes. The new printing machine will increase BPC's revenue by $250,000 per year but the variable costs will also increase by $45,000 per year. The machine will be depreciated on a straight-line basis to zero salvage value over the 4 years life of the project. BPC believes it can sell the machine at the end of 4 years for $20,000. The company will require additions to current assets of $35,000 at the beginning of the project, which will be fully recoverable at the end of the fourth year. BCP's required payback is 3 years and required rate of return is 12%. The company tax rate is 30%. As a financial manager of the company, you're conducting a capital budgeting analysis of this project. a. Calculate the incremental cash flows for each year (Yo to Ya inclusive). (15 marks) b. Calculate the payback period of the project. (Show answer correct to two decimal places.) (3 marks) c. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project. (Show answer correct to the nearer cent.) (5 marks) d. Calculate the present value index of the project. (Show answer correct to four decimal places.) (2 marks) e. Calculate the discounted payback period of the project. (Show answer correct to two decimal places) (4 marks) f. Calculate the intemal rate of return of the project using trial & error and interpolation' method. (Show answer correct to four decimal places) (6 marks) g. Explain under each criteria (that you calculated above) and overall if the company should accept this project or not. (5 marks)
Expert Answer:
Answer rating: 100% (QA)
Answer a I Cost of market research is a sunk cost and hence not relevant cash flow for capital budgeting decision Initial investment Purchase cost of machineryCost of installation 44000010000 450000 T... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt , Eugene F. Brigham
Posted Date:
Students also viewed these accounting questions
-
A firm is considering the purchase of a new machine to increase the productivity of existing production process. All the alternatives have a life of 10 years and they have negligible market value...
-
A small manufacturing firm is considering the purchase of a new boring machine to modernize one of its production lines. Two types of boring machine are available on the market. The lives of machine...
-
An appliance manufacturer is considering the purchase of a new machine for stamping out sheet metal parts. If 0 (given) is the true average of the number of good parts stamped out per hour by their...
-
At t = 0, a particle is traveling parallel to very large insulating plate at a 0.360 m distance with a speed of 980 m/s. Consider that the insulating plate has uniform surface charge density 2.34. x...
-
How does Goldratts Theory of Constraints (TOC) differ from other current approaches to continuous improvement in organizations? How is it similar?
-
Refer to Problem 1. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .3 and P (high) = .7. a. Determine...
-
Tektronix, Inc., an Oregon-based MNE, manufactures scientific instruments. Jerry Davies, Treasurer, needs to choose an instrument to hedge a \( 2,000,000\) sale to Siemens in Germany, with payment...
-
On July 1, 2014, Sugarland Company issued $2,000,000 face value of 10%, 10-year bonds at $1,770,602, a yield of 12%. Sugarland uses the effective-interest method to amortize bond premium or discount....
-
A true-false test contains 10 questions. In how many different ways can this test be completed? (Assume we don't care about our scores.) This test can be completed in different ways.
-
For the convenience of its reporters and staff based in London, CNN operates a motor pool. The motor pool operated with 25 vehicles until February of this year, when it acquired an additional...
-
Discuss one alternative possibility that would also explain the observation of +.3 value between the variables.
-
How are the mean square value, autocorrelation function, and the power spectral density function of a stationary random process related?
-
What is an impulse-response function?
-
Free end a. Bending moment \(=0\); shear force equals the b. Deflection \(=0\); slope \(=0\) c. Deflection \(=0\); bending moment \(=0\) d. Bending moment \(=0\); shear force \(=0\)
-
Express the response of a single-degree-of-freedom system using the Duhamel integral.
-
Fill in the Blank. The power spectral density \(\mathrm{S}(\omega)\) of a stationary random process is defined as the transform of \(R(\tau) / 2 \pi\).
-
8 Purple Beverages Inc. sells only one product, the very popular and strong Purple Rain drink. The drinks are sold to local fraternity and sorority clubs. Purple Beverages Inc. had the following...
-
Solve the relation Exz:Solve therelation ne %3D
-
You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firms R&D department. The equipments basic price is $70,000, and it would cost...
-
How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?
-
Describe the recapitalization process and apply it to PizzaPalace. Calculate the resulting the value of the debt that will be issued, the resulting market value of equity, the price per share, the...
-
The income statement of Barbra Streisand Company is shown below. Additional information: 1. Accounts receivable decreased \($280,000\) during the year. 2. Prepaid expenses increased \($150,000\)...
-
George Clooney Company's income statement for the year ended December 31 2002, contained the following condensed information. Clooney s balance sheet contained the following comparative data at...
-
The financial statements of Frank B. Robinson Company appear below. Additional information: 1. Dividends declared and paid were \($3,000\). 2. During the year equipment was sold for \($8,500\) cash....
Study smarter with the SolutionInn App