Question: The managers of Favorite Fish are considering a new project

The managers of Favorite Fish are considering a new project for which they would purchase equipment costing $150,000 to produce a new line of canned fish. The managers believe that they can sell 10,000 cans of fish a year at $8.00 per can. Variable costs should be about $2.50 per can and fixed costs should be $20,000 annually. They believe that the project life should last 8 years and that the equipment will qualify for the 7-year MACRS schedule. The company’s tax rate is 30%, and they would like an after-tax return of 12% for this project. When the accounting developed a spreadsheet, the NPV was just over $2,000. Develop a spreadsheet with an input section for all of the relevant information. You should be able to vary all of the information except the MACRS schedule values. Several of the managers had concerns. Perform sensitivity analysis using the spreadsheet and answer the following questions. Assume that the managers would like an NPV of about $2,000 for all of the following options. Also assume that each option is independent of the others; that is, go back to the original data after performing each analysis.

A. The fishing supervisor is concerned that variable costs for fish will increase because supplies are dwindling. He would like to know the volume of sales needed if the variable cost per can increases to $3.50.
B. The marketing manager believes that volume of sales could increase by 20% if an annual advertising campaign were undertaken. How much could marketing spend if volume increased by 20%?
C. The manufacturing foreman believes that fixed costs could be 15% higher than estimated.
How much will the price have to increase to accommodate this increase?
D. If taxes increase to 35%, will Favorite Fish still want to develop this product line?
E. Suppose that the capacity could be used for a project that is expected to achieve an after-tax return of 14%. Which project should Favorite Fish undertake?

View Solution:

Sale on SolutionInn
  • CreatedJanuary 26, 2015
  • Files Included
Post your question