A small business wants to invest in a new machine to maximize its productive capacity of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A small business wants to invest in a new machine to maximize its productive capacity of sugar wax. The purchase price of the new machine is $337,500 which will have an economic life of five years. There is installation and commissioning cost of $23,500 and $14,000 respectively. Management is anticipating the production of 42,500 bottles of sugar wax for the local market annually. Each bottle of sugar wax will be sold for $80 and will cost $45 to produce. A previous market research has indicated that the small business could gain 14% of the market in the first three years and 10% in the final two years. Other relevant information are as follows: • Variable distribution cost of $4 each • Annual promotion cost of 2% of sales revenue • Depreciate the machine using the straight-line method. There is a scrap value of $5,000. The required rate of return on debt is 20% (stated net) and return on equity is 14% Currently the assets of the company are funded by 70% debt and 30% equity Corporation tax rate is 30%. *** Depreciation is an allowable deduction for tax purposes. Required: (a) The annual operating income after tax and the operating cash flows of the project and the net present value (NPV). (29 marks) (b) Internal Rate of Return and Profitability index of the project. (7 marks) (c) A Recommendation to the management team to accept or reject the project. (2 marks) (d) Discuss three (3) factors that the entity can consider when implementing this project? A small business wants to invest in a new machine to maximize its productive capacity of sugar wax. The purchase price of the new machine is $337,500 which will have an economic life of five years. There is installation and commissioning cost of $23,500 and $14,000 respectively. Management is anticipating the production of 42,500 bottles of sugar wax for the local market annually. Each bottle of sugar wax will be sold for $80 and will cost $45 to produce. A previous market research has indicated that the small business could gain 14% of the market in the first three years and 10% in the final two years. Other relevant information are as follows: • Variable distribution cost of $4 each • Annual promotion cost of 2% of sales revenue • Depreciate the machine using the straight-line method. There is a scrap value of $5,000. The required rate of return on debt is 20% (stated net) and return on equity is 14% Currently the assets of the company are funded by 70% debt and 30% equity Corporation tax rate is 30%. *** Depreciation is an allowable deduction for tax purposes. Required: (a) The annual operating income after tax and the operating cash flows of the project and the net present value (NPV). (29 marks) (b) Internal Rate of Return and Profitability index of the project. (7 marks) (c) A Recommendation to the management team to accept or reject the project. (2 marks) (d) Discuss three (3) factors that the entity can consider when implementing this project?
Expert Answer:
Answer rating: 100% (QA)
a The first step in calculating the annual operating income after tax and operating cash flows of the project is to determine the annual sales revenue variable costs fixed costs and depreciation expen... View the full answer
Related Book For
Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu
Posted Date:
Students also viewed these accounting questions
-
Caribbean Manufacturers Ltd (CML) wants to invest in a new machine to start producing cocoa chips. The purchase price of the new machine is $6,750,000 which will have an economic life of five years....
-
List three specific parts of the Case Guide, Objectives and Strategy Section (See below) that you had the most difficulty understanding. Describe your current understanding of these parts. Provide...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Pick a Nigerian brand that has been very successful competing against the bigger global brands in its product category. What are the elements of its strategy that have enabled it to achieve this...
-
Identifying appropriate product costing systems for three real world companies Obtain the Form 10-Ks for these three companies: AGCO Corporation, Crown Holdings, Inc., and Noble Corporation. To...
-
Suppose we want to store JellyBean objects. Which of the following require JellyBean to implement the Comparable interface or create a Comparator to add them to the collection? (Choose two.) A....
-
Larry Riley formed a rental agreement for a self-storage unit with Iron Gate Self Storage in December 2003. The agreement stated that a maximum of \($5,000\) of personal property could be stored in...
-
The following income statement was drawn from the records of Ulrich Company, a merchandising firm: .:. Required a. Reconstruct the income statement using the contribution margin format. b. Calculate...
-
Consider a market with 4 agents a,...,d and 4 houses 1,...,4. The preference orders of agents over the houses are given by a: 1>2>3>4 b:1>2>3>4 c:1>2>3>4 d:4>3>2>1 How many Pareto efficient...
-
Dr. Linda Piro is considering opening a chiropractic clinic. Dr. Piro will see patients and her husband Lars will run clinic operations. The clinic will be open 4 days per week. Lars found a clinic...
-
Suppose you have a choice of two coffee cups of the type shown, one that bends outward and one inward, and you notice that they have the same height and their shapes fit together snugly. You wonder...
-
Rod Bullhorn is a resident of Ohio. Mr. Bullhorn purchased an Ohiomunicipal bond. What is the tax treatment of the interest that Rod earns on his Ohio bond?
-
What is conversion?
-
Assuming we are now dealing with steady-state diffusion through the spherical wall shown in the next figure. D = constant. The inner radius is r, and the outer radius is r. C(r)=C, and C()=C. Also C...
-
The work performed as a function of time for a process is given by W = at, where a = 2.4 J/s3, What is the instantaneous power output at t = 3.7 s?
-
what effective rate of interest is being charged if a golf club's $10,000 initiation fee is paid by 12 beginning of the month payments of $1000?
-
ABC Ltd manufactures phone handsets and provides telecommunication services to customers either directly to customers or via distributors. In July 20X1, the Board of Directors for ABC Ltd are unhappy...
-
In Problem 8.43, determine the smallest value of for which the rod will not fall out of the pipe. IA -3 in.-
-
Starbucks purchases and roasts high-quality, whole-bean coffees, its hallmark, and sells them, along with other coffee-related products, primarily through its company-operated retail stores. Suppose...
-
From a particular joint process, Edgerton company produces three products, A, B, and C. Each product may be sold at the point of split-off or processed further. Additional processing requires no...
-
Lakeview School, a private high school, is preparing a planned income statement for the coming academic year ending August 31, 2010. Tuition revenues for the past two years ending August 31 were...
-
A cylinder of mass \(M\), moment of inertia \(I\) about the cylindrical axis and radius \(R\) rolls on a horizontal surface without slipping. (a) Express the no-slip constraint in differential form....
-
A block of mass \(m\) slides without friction on a larger block of mass \(M\) and is attached to a pin in this block by a massless spring with spring constant \(k\). All motion is in one dimension....
-
A bead of mass \(m\) is threaded without friction on a massless wire hoop of radius \(R\) that is forced to oscillate vertically in a fixed vertical plane at angular frequency \(\omega\) and with...
Study smarter with the SolutionInn App