The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results of the company, which has been mediocre for the past couple of years, have been presented in the annual financial statement. Sales (1 million units x 10$) 10 000 000S Fixed Costs (5 000 000) Variable Costs (1 million units x 7$) (7 000 000) Depreciation (3 000 000) Annual Profit (loss) (5 000 000) According to the experts, the loss has been caused by the poor performance of the equipment in the factory. They suggest to the board of directors to replace the old equipment by new ones. Considering following information, the board of directors asks you to evaluate this project for the company. The new equipment would increase the level of production and allow the company to avoid this loss entirely, but there is no projection concerning any profit. The purchase (including the installation) of the new equipment requires an initial investment for an amount of 8 000 000S. The old equipment can be sold in the beginning of project on the market for 500 000S (For simplification, consider this amount as an exchange value). The new equipment will be sold for 1 000 000S in 10 years (end of project). The project also requires major renovations of the factory building for a total amount of 1 000 000S (The amount of major renovations is depreciable with declining method under the tax law). • The company also has to build a new building at the beginning of the project for an amount of 2 400 000S which will be sold at the end of the project for 3 200 000$. This amount is depreciable with declining method. The project also requires an additional investment in new Computers and furniture for a total amount of 400 000$ in the beginning of project. Computers and furniture have no salvage value. • At the present time, Smart Inc. is renting a warchouse for the annual rent of 50 000S (paid at the end of year). If the company undertakes the new project, they will need to cancel the lease of the old warehouse and to rent a larger warehouse for the annual rent of 200 000$ (to be paid annually at the end of each year). The project also requires 5 new technicians today with annual salary of 60 000$ for each. • Given the performance of new equipment, Smart Inc could lay off 80 employees whose annual salaries is 40 000S. The lay-offs will oblige the company to pay lay-off premiums for the total amount of 10 000$ to each employee which will be tax deductible. The corporate tax rate is at 40%. The new equipment and new heavy machinery are in the category with a depreciation of 20%, the major renovations are depreciated at 25%, the new building is depreciated at 10%, all items depreciations are calculated with decreasing (declining) method. The computers and furniture are depreciated by linear method at 10%. Investors require 12% return on this type of project. Given this information, answer the following questions: 1. Identify ONE BY ONE each item of the investment and calculate the total investment in this project. 2. Identify ONE BY ONE and calculate separately the present value of each periodical cash flow (annual incomes and expenses) during the project. 3. Identify ONE BY ONE and calculate separately the present value of each cash flow of the end of the project. 4. Calculate the Net Present Value of this project (You just have to add up your responses in 1, 2 and 3 for this one). The company Smart Inc. is a company that produces Dog Shampoo in Toronto area. The results of the company, which has been mediocre for the past couple of years, have been presented in the annual financial statement. Sales (1 million units x 10$) 10 000 000S Fixed Costs (5 000 000) Variable Costs (1 million units x 7$) (7 000 000) Depreciation (3 000 000) Annual Profit (loss) (5 000 000) According to the experts, the loss has been caused by the poor performance of the equipment in the factory. They suggest to the board of directors to replace the old equipment by new ones. Considering following information, the board of directors asks you to evaluate this project for the company. The new equipment would increase the level of production and allow the company to avoid this loss entirely, but there is no projection concerning any profit. The purchase (including the installation) of the new equipment requires an initial investment for an amount of 8 000 000S. The old equipment can be sold in the beginning of project on the market for 500 000S (For simplification, consider this amount as an exchange value). The new equipment will be sold for 1 000 000S in 10 years (end of project). The project also requires major renovations of the factory building for a total amount of 1 000 000S (The amount of major renovations is depreciable with declining method under the tax law). • The company also has to build a new building at the beginning of the project for an amount of 2 400 000S which will be sold at the end of the project for 3 200 000$. This amount is depreciable with declining method. The project also requires an additional investment in new Computers and furniture for a total amount of 400 000$ in the beginning of project. Computers and furniture have no salvage value. • At the present time, Smart Inc. is renting a warchouse for the annual rent of 50 000S (paid at the end of year). If the company undertakes the new project, they will need to cancel the lease of the old warehouse and to rent a larger warehouse for the annual rent of 200 000$ (to be paid annually at the end of each year). The project also requires 5 new technicians today with annual salary of 60 000$ for each. • Given the performance of new equipment, Smart Inc could lay off 80 employees whose annual salaries is 40 000S. The lay-offs will oblige the company to pay lay-off premiums for the total amount of 10 000$ to each employee which will be tax deductible. The corporate tax rate is at 40%. The new equipment and new heavy machinery are in the category with a depreciation of 20%, the major renovations are depreciated at 25%, the new building is depreciated at 10%, all items depreciations are calculated with decreasing (declining) method. The computers and furniture are depreciated by linear method at 10%. Investors require 12% return on this type of project. Given this information, answer the following questions: 1. Identify ONE BY ONE each item of the investment and calculate the total investment in this project. 2. Identify ONE BY ONE and calculate separately the present value of each periodical cash flow (annual incomes and expenses) during the project. 3. Identify ONE BY ONE and calculate separately the present value of each cash flow of the end of the project. 4. Calculate the Net Present Value of this project (You just have to add up your responses in 1, 2 and 3 for this one).
Expert Answer:
Answer rating: 100% (QA)
1 Investment items and total Investment items New Equipment 800000000 Old Equipment 50000000 Factory Building 100000000 New Building 240000000 Compute... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
. Heron, Inc. is a company that re-sells one product, a lawn chair. A contractor makes the product exclusively for Heron, so Heron has no manufacturing costs. Henron sells each chair for $10 per...
-
Farley, Inc. is a manufacturer that produces customized computer components for several well-known computer-assembly companies. Farleys latest contract with CompWest.com calls for Farley to deliver...
-
Farley, Inc. is a manufacturer that produces customized computer components for several well-known computer-assembly companies. Farleys latest contract with CompWest.com calls for Farley to deliver...
-
5) Pablo Escobar has recently opened a slipper sandal Shop in Brisbane, Australia, a store that specializes in fashionable sleeper sandals. Pablo has just received a degree in business and he is...
-
Why is business dynamism important in a world class manufacturing environment? Give three examples of supply chain dynamism.
-
An electron with initial kinetic energy 5.5eV encounters a square potential barrier with height 10.0eV. What is the thickness of the barrier if the electron has a 0.10% probability of tunneling...
-
Split the National Football League data used in Problem 3.1 into estimation and prediction data sets. Evaluate the statistical properties of these two data sets. Develop a model from the estimation...
-
Listed below are altitudes (thousands of feet) and outside air temperatures (degrees Fahrenheit) recorded by the author during Delta Flight 1053 from New Orleans to Atlanta. Is there sufficient...
-
Calculate the loan risk associated with a $2 million, five-year loan to a BBB-rated corporation in the computer parts industry that has a duration of 6.4 years. The cost of funds for the bank is 8...
-
You are employed by McDowell and Partners, Chartered Accountants (M&P). A new client, Community Finance Corporation (CFC), approached M&P for assistance. Enviro Ltd. (Enviro) has asked CFC for a loan...
-
Use Mayer-Vietoris to compute the homology groups of a Torus Let X = T2 be the torus, U,V CX the subsets U = T 21 ((x, y, z) ET2 | (x-2)^2+z^2= 1, y = 0), V=T2\((x, y, z) ET 2 | (x + 2)^2+z^2 = 1, y...
-
- b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected...
-
1 . A 7 - year, $ 1 0 0 0 par, semi - annual pay 8 % fixed coupon bond has a market discount rate of 6 % with 2 years to maturity. What is the market price of the bond?
-
1 1 . You are purchasing a new home and need to borrow $ 3 2 5 , 0 0 0 from a mortgage lender. The mortgage lender quotes you a rate of 6 . 5 % APR for a 3 0 - year fixed rate mortgage ( with...
-
Osborn Manufacturing uses a predetermined overhead rate of $18.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $224,480 of total manufacturing overhead...
-
Assume that the spot exchange rate is 1 . 3 8 USD / GBP , while interest rates are 3 . 2 % in the US and 2 . 5 % in the UK . a . According to international parity conditions, what is the expected 6 -...
-
Explain in detail why its important to have standard based protocols.
-
Fahrad Inc. sells all of its product on account. Fahrad has the following accounts receivable payment experience: Percent paid in the month of sale .........10 Percent paid in the month after the...
-
The Alfredo Fragrance Company produces only one product, a perfume called Hint of Elegance. Hint of Elegance consists of two secret ingredients blended into an exclusive fragrance, which is marketed...
-
What is the difference between postponement and channel assembly?
-
Each breakdown of a graphic plotter table at Airbus industries costs $50. Find the expected daily breakdown cost, given the followingdata: Number of breakdowns Daily breakdown probability .1 .2.4 .2 1
-
What are the differences among an onsite team, a virtual team, a task force, and a committee? What are some of the potential differences in dynamics between people in these different groups?
-
What are the benefits of implementing programs to address cultural competence within a health care organization? What are the costs of not implementing such programs?
-
Over the past month, every member of the Intravenous (IV) Therapy Team has complained to you about the IV Team supervisor. Her direct reports, all RNs, agree that she is technically superb. However,...
Study smarter with the SolutionInn App