Consider a firm that wants to use a warehouse for a project that involves producing toys....
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Consider a firm that wants to use a warehouse for a project that involves producing toys. Last year, the firm spent $20,000 on renovations to the warehouse, which it bought many years ago, although it turns out these renovations won't affect the cash flows of the project. Today, it realized it could use the warehouse for another project that involves producing boats and yields free cash flows of $100,000 per year for the next five years. The warehouse's current market value, which equals its book value, is $300,000, and the firm will fully straight-line depreciate the warehouse over the next 5 years. At the end of the five years, its market value will be 0. The project the firm is considering involves making toys. It also has a life of five years and requires $30,000 in net working capital immediately, which will be recovered at the end of the project. It expects to sell 60,000 units of toys in each of the five years of production. Toys are expected to sell for $5 per toy in the first year. Toy prices will grow by 2% each year for the life of the project. Each toy costs $2 to make. Once toy production starts, the project will require annual fixed costs of $55,000. Neither the fixed nor variable costs are expected to grow over time. Should the firm undertake the toy project? Assume a tax rate of 35% and a discount rate of 12%. Consider a firm that wants to use a warehouse for a project that involves producing toys. Last year, the firm spent $20,000 on renovations to the warehouse, which it bought many years ago, although it turns out these renovations won't affect the cash flows of the project. Today, it realized it could use the warehouse for another project that involves producing boats and yields free cash flows of $100,000 per year for the next five years. The warehouse's current market value, which equals its book value, is $300,000, and the firm will fully straight-line depreciate the warehouse over the next 5 years. At the end of the five years, its market value will be 0. The project the firm is considering involves making toys. It also has a life of five years and requires $30,000 in net working capital immediately, which will be recovered at the end of the project. It expects to sell 60,000 units of toys in each of the five years of production. Toys are expected to sell for $5 per toy in the first year. Toy prices will grow by 2% each year for the life of the project. Each toy costs $2 to make. Once toy production starts, the project will require annual fixed costs of $55,000. Neither the fixed nor variable costs are expected to grow over time. Should the firm undertake the toy project? Assume a tax rate of 35% and a discount rate of 12%.
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The firm has two options to use the warehouse for the toy project or to use it for the boat project ... View the full answer
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
Posted Date:
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