Allied Products Allied Products Inc., has recently won approval from the Federal Aviation Administration (FAA) for...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Allied Products Allied Products Inc., has recently won approval from the Federal Aviation Administration (FAA) for its Enhanced Ground Proximity Warning System (GPWS). This system is designed to give airplane pilots additional warning of approaching ground danger and thus help prevent crashes. Allied Products has spent $10 million in research and development the past four years developing GPWS. The GPWS will be put on the market beginning this year and Allied Products expects it to stay on the market for a total of five years. As a financial analyst specializing in the aerospace industry for USC Pension & Investnent, Inc., you are asked by your managing partner, Mr. Adam Smith, to evaluate the potential of this new GPWS project. Initially, Allied Products will need to acquire $42 million in production equipment to make the GPWS. The equipment is expected to have a seven-year useful life. This equipment can be sold for $12 million at the end of five years. Allied Products intends to sell two different versions of the GPWS: 1. New GPWS - intended for installation in new aircraft. The selling price is $70,000 per system and the variable cost of production is $50,000 per system. (Assume cash flows occur at year-end.) 2. Upgrade GPWS - intended for installation on existing aircraft with an older version ground proximity radar in place. The selling price of the Upgrade system is $35,000 per system and the variable cost to produce it is $22,000 per system. Allied Products intends to raise prices at the same rate as inflation. Variable costs will also increase with inflation. In addition, the GPWS project will also incur $3 million in marketing and general administration costs the first year (expected to increase at the same rate as inflation). Allied Products' corporate tax rate is 40 percent. Assume that the equity beta listed in Value Line Investment Survey (the latest edition) is the best estimate of Allied Products' beta. A five-year U.S. Treasury Bond has a rate of 6.20 percent and the S&P 500 recent years' historical average excess return (i.e., the market return less the Treasury bond rate) is 8.3 percent. Annual inflation is expected to remain constant at 3 percent. Further, suppose Allied Products' cost of debt is 6.2 percent and (although somewhat unrealistic) its debt-to-equity ratio is 50 percent and will remain at 50 percent for at least five years. Commercial Aircraft Market The state of the economy has a major impact on the airplane manufacturing industry. Airline industry analysts have the following production expectations, depending on the annual state of the economy for the next five years: Table 12.4 State of Economy Strong growth Moderate growth Probability of State Severe recession 15. .45 Mild recession .30 .10 New Aircraft (year 1) 350 250 150 50 Annual Growth .15 .10 .06 .03 While probabilities of each state of the economy will not change during the next five years, airplane production for each category will increase, as shown in Table 12.4, each year after year 1. The FAA requires that these planes have new ground proximity warning systems, of which there are a number of manufacturers besides Allied Products. Allied Products estimates that there are approximately 12,500 existing aircraft that comprise the market for its GPWS Upgrade package. Due to FAA regulations, all existing aircraft will be required to get an upgraded ground proximity warning system within the next five years, again, not necessarily from Allied Products. Allied Products believes the upgrades of the existing aircraft fleet will be spread evenly over the five years (the time value of money would suggest manufacturers defer purchasing upgrades. until the fifth year; however, consumer demand for the additional safety will induce earlier upgrades). Allied Products uses the MACRS depreciation schedule (seven-year property class). The immediate initial working capital requirement is $2 million and thereafter the net working capital requirements will be 5 percent of sales. Allied Products has a number of competitors both in the new GPWS and upgrade GPWS markets but expects to dominate the market with a 45 percent share. Instructions: 1. Assume 1.2 for equity beta. 2. Find incremental cash flows (don't forget to incorporate inflation). 3. Discount cash flows and compute the NPV. Depreciation Schedule: Table 6.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS) Year 123456 7 8 9 10 11 12 13 14 15 16 17 18 18 19 8 20 21 3 Years .3333 .4445 1481 0741 5 Years 2000 .3200 1920 1152 1152 0576 Recovery Period Class 7 Years .1429 .2449 1749 1249 0893 0892 0893 0446 10 Years .1000 .1800 1440 1152 0922 .0737 .0655 0655 .0656 0655 .0328 15 Years .0500 .0950 0855 .0770 .0693 0623 .0590 0590 0591 0590 .0591 0590 0591 0590 0591 0295 20 Years 03750 07219 06677 .06177 05713 05285 04888 04522 04462 04461 04462 04461 04462 04461 04462 04461 04462 04461 04462 .04461 02231 Depreciation is expressed as a percentage of the asset's initial cost. These schedules are based on IRS Publication 946, entitled How to Depreciate Property. Details of depreciation are presented later in the chapter. Five-year depre- ciation actually carries over six years because the IRS assumes the purchase is made midyear. Allied Products Allied Products Inc., has recently won approval from the Federal Aviation Administration (FAA) for its Enhanced Ground Proximity Warning System (GPWS). This system is designed to give airplane pilots additional warning of approaching ground danger and thus help prevent crashes. Allied Products has spent $10 million in research and development the past four years developing GPWS. The GPWS will be put on the market beginning this year and Allied Products expects it to stay on the market for a total of five years. As a financial analyst specializing in the aerospace industry for USC Pension & Investnent, Inc., you are asked by your managing partner, Mr. Adam Smith, to evaluate the potential of this new GPWS project. Initially, Allied Products will need to acquire $42 million in production equipment to make the GPWS. The equipment is expected to have a seven-year useful life. This equipment can be sold for $12 million at the end of five years. Allied Products intends to sell two different versions of the GPWS: 1. New GPWS - intended for installation in new aircraft. The selling price is $70,000 per system and the variable cost of production is $50,000 per system. (Assume cash flows occur at year-end.) 2. Upgrade GPWS - intended for installation on existing aircraft with an older version ground proximity radar in place. The selling price of the Upgrade system is $35,000 per system and the variable cost to produce it is $22,000 per system. Allied Products intends to raise prices at the same rate as inflation. Variable costs will also increase with inflation. In addition, the GPWS project will also incur $3 million in marketing and general administration costs the first year (expected to increase at the same rate as inflation). Allied Products' corporate tax rate is 40 percent. Assume that the equity beta listed in Value Line Investment Survey (the latest edition) is the best estimate of Allied Products' beta. A five-year U.S. Treasury Bond has a rate of 6.20 percent and the S&P 500 recent years' historical average excess return (i.e., the market return less the Treasury bond rate) is 8.3 percent. Annual inflation is expected to remain constant at 3 percent. Further, suppose Allied Products' cost of debt is 6.2 percent and (although somewhat unrealistic) its debt-to-equity ratio is 50 percent and will remain at 50 percent for at least five years. Commercial Aircraft Market The state of the economy has a major impact on the airplane manufacturing industry. Airline industry analysts have the following production expectations, depending on the annual state of the economy for the next five years: Table 12.4 State of Economy Strong growth Moderate growth Probability of State Severe recession 15. .45 Mild recession .30 .10 New Aircraft (year 1) 350 250 150 50 Annual Growth .15 .10 .06 .03 While probabilities of each state of the economy will not change during the next five years, airplane production for each category will increase, as shown in Table 12.4, each year after year 1. The FAA requires that these planes have new ground proximity warning systems, of which there are a number of manufacturers besides Allied Products. Allied Products estimates that there are approximately 12,500 existing aircraft that comprise the market for its GPWS Upgrade package. Due to FAA regulations, all existing aircraft will be required to get an upgraded ground proximity warning system within the next five years, again, not necessarily from Allied Products. Allied Products believes the upgrades of the existing aircraft fleet will be spread evenly over the five years (the time value of money would suggest manufacturers defer purchasing upgrades. until the fifth year; however, consumer demand for the additional safety will induce earlier upgrades). Allied Products uses the MACRS depreciation schedule (seven-year property class). The immediate initial working capital requirement is $2 million and thereafter the net working capital requirements will be 5 percent of sales. Allied Products has a number of competitors both in the new GPWS and upgrade GPWS markets but expects to dominate the market with a 45 percent share. Instructions: 1. Assume 1.2 for equity beta. 2. Find incremental cash flows (don't forget to incorporate inflation). 3. Discount cash flows and compute the NPV. Depreciation Schedule: Table 6.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS) Year 123456 7 8 9 10 11 12 13 14 15 16 17 18 18 19 8 20 21 3 Years .3333 .4445 1481 0741 5 Years 2000 .3200 1920 1152 1152 0576 Recovery Period Class 7 Years .1429 .2449 1749 1249 0893 0892 0893 0446 10 Years .1000 .1800 1440 1152 0922 .0737 .0655 0655 .0656 0655 .0328 15 Years .0500 .0950 0855 .0770 .0693 0623 .0590 0590 0591 0590 .0591 0590 0591 0590 0591 0295 20 Years 03750 07219 06677 .06177 05713 05285 04888 04522 04462 04461 04462 04461 04462 04461 04462 04461 04462 04461 04462 .04461 02231 Depreciation is expressed as a percentage of the asset's initial cost. These schedules are based on IRS Publication 946, entitled How to Depreciate Property. Details of depreciation are presented later in the chapter. Five-year depre- ciation actually carries over six years because the IRS assumes the purchase is made midyear.
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The random variable R (Figure 12.13) is designed to give stations different delays when a collision has occurred. To alleviate the collision, we expect that different stations generate different...
-
The Federal Aviation Administration reports that American Airlines got 6.06 complaints of mishandle baggage per 1000 passengers in 2008. Assuming this rate applies to the next 500 passengers who...
-
A major issue facing the Federal Aviation Administration is congestion in the airways caused by too many planes seeking to take off or land at peak times at high-demand airports. How might we solve...
-
Discuss the primary sources of nonverbal communication.
-
The addition of a turbocharger to a small V-6 engine that gets 18 miles per gallon of gasoline can boost its power to that of a V-8 engine and increase fuel efficiency at the same time. If Bill will...
-
Colson Company has a line of credit with Federal Bank. Colson can borrow up to $800,000 at any time over the course of the Year 1 calendar year. The following table shows the prime rate expressed as...
-
In Exercises 1 to 4, it may be helpful to draw a figure such as Figure 5.5. Figure 5.5. Using the normal curve table, determine the area of the standard normal distribution that is less than the...
-
In this problem, you will see why the Equity Premium Puzzle described in Application 4.5 really is a puzzle. Suppose that a person with $100,000 to invest believes that stocks will have a real return...
-
Sandhill Inc.'s adjusted trial balance at May 31, 2025 is shown here. Compute the retained earnings balance as of May 31. Sandhill Inc. reported net income of $10,600 during May. Account Titles Debit...
-
An example in this chapter referred to a survey of 410 human resource professionals. If those subjects are identified with numbers from 1 through 410, does it make sense to calculate the average...
-
A. Supposed that you have this Sate Space with 2 Goals Gl and G2 Goal State Formulate this State Space as a search tree. Solve the problem using DS for the 2 goals. Solve the problem using BS for...
-
Assume that Bernie is married and his wife consents to the same gifts as in the question above. ( in cash,: $ 1 1 5 , 0 0 0 to Donald; $ 1 5 , 0 0 0 to Elizabeth; $ 5 , 0 0 0 to Amy; $ 2 0 , 0 0 0 to...
-
Most of the black holes observed by astronomers have masses equal to a few solar masses (the result of the death of a high mass star) or have masses equal to several million solar masses (found at...
-
What would be the best initial therapy non-pharmacologic and pharmacologic to be recommended to C.B?
-
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have $7,500 per month for the next three years, or you can...
-
In its 2013 Form 10-K report filed with SEC, the Goldman Sachs Group make the following statements about its business activities: Investment banking serves corporate and government clients around the...
-
Apple Inc. is one of the most profitable companies in the worldwith revenues of more than $225 billion . For more than consecutive yearsit has ranked number one on Fortune's list of the "World's Most...
-
Data on weekday exercise time for 20 females, consistent with summary quantities given in the paper An Ecological Momentary Assessment of the Physical Activity and Sedentary Behaviour Patterns of...
-
You invested $10,000 in the stock of HiFly Inc. two years ago. Since then the stock has done very well more than doubling in value. You tried to analyze HiFlys financial statements twice in the last...
-
Write a brief verbal description of the logic behind the development of the time value formulas for annuities.
-
Describe the underlying meaning of compounding and compounding periods. How does it relate to time value? Include the idea of an effective annual rate (EAR). What is the annual percentage rate (APR)?...
-
Sumitomo Cable manufactures various types of aluminum and copper cables which it sells directly to retail outlets through its distribution channels. The manufacturing process for producing cables...
-
The Cooper Furniture Company of Potomac, Maryland, assembles two types of chairs (Recliners and Rockers). Separate assembly lines are used for each type of chair. Classify each cost item (AI) as...
-
The following data are for Marvin Department Store. The account balances (in thousands) are for 2017. 1. Compute (a) the cost of goods purchased and (b) the cost of goods sold. 2. Prepare the income...
Study smarter with the SolutionInn App