Monarch Corporation is going to start a new product line of products in a whole new market. the data for analysis is presented below:

Cost of the equipment needed......................$194,000 five year property for tax depreciation

New working capital needs...........................$50,000 will be recovered at the end of the third year

Projected new revenues:

Sales                     Probability

$200,000..........................30%

$250,000..........................50%

$300,000..........................20%

REQUIRED:
a. Compute below the payback, irr, and npv. For npv use the cost of capital as the discount rate for part (a) assume the revenue is $200,000.
b. Copy the worksheet and solutions for part a to the worksheet part b, and redo the computations for a revenue of $250,000
c. Copy the worksheet and solutions for part a to the worksheet part c, and redo the computations for a revenue of $300,000. List the three npvs and compute the expected npv. Indicate whether monarch should do the project? If so why? If not why?
d. Take the irrs calculated for the three different levels of revenue and compute the mean (expected return, standard deviation, and coefficient of variation given the probabilities for the three different irrs. Remember you can list the irrs based on how often they will occur, 3, 5, or 2 times out of 10.
f. Based on the results for part d, assume the discount rate to compute npv is based on the following:

Coefficient                              Disc rate
Up to .15………………………….10%
.16-.30…………………………….12%
.31-.45…………………………….15%
Above 45………………………….20%

Recomputed the npvs using the new discount rate and the expected values of their npvs would you still do the project? If so why?  If not why?

Transcribed Image Text:

Cost of goods sold 30% Variable cash costs 10% Annual fixed cash costs: Rent 50,000 Cleaning 20,000 Maintenance & other 10,000 Total fixed costs 80,000 Equipment disposal proceeds 19,400 Cost of capital 12.00% Tax rate 35% Depreciation rates for tax purposes: Year one 20.00% Year two 32.00% Year three 19.20% 11.50% Year four Year five 11.50% Year six 5.80%