Atlanta Cookie (A Cookie) wishes to purchase a cookie making system that requires the purchase of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Atlanta Cookie (A Cookie) wishes to purchase a cookie making system that requires the purchase of a mixer costing $42,500 and an oven costing $35,000. This new cookie making system project is expected to meet the firm's growing demand for fabulous, fat- free cookies for the foreseeable future. The firm plans to use a 12% cost of capital to evaluate the project. The before tax annual cookie sales revenues over the life the project are shown in the following table: Year 1 2 3 4 Estimated Sales Revenue $70,000 $112.000 $160,000 $163,000 5 $92,000 It is expected that the system will have a zero salvage value and be depreciated straight line over its five-year life. The equipment is not expected to have a market value in five years. The company will get bank financing at a rate of 8% effective annual interest rate for the initial investment. After purchasing the new cookie making system, A Cookie will hire Emanuel Jackson to maintain, operate and train other employees on how to use the new equipment. Emanuel will require a salary and benefits totaling $70,000 per year. Emanuel previously worked for the consulting company that recommended this system to A Cookie. A Cookie paid Emanuel's firm $30,000 to determine which system was ideally suited for them. Flour, sugar butter and other ingredients are estimated to cost 20% of sales annually. The system is so terrific it is believed that A Cookie's baking process will become the industry standard and open new distribution channels, however, the initial cost of setting up these new distribution channels is estimated to be $50,000. The increases in sales from the new customers are incorporated in the estimated sales revenue estimates above. The firm estimates that the project will require an increase in net working capital of $4,000, which will be recovered at the end of the life of the project. The company is in the combined 40% state and federal tax brackets. 1) What is the NPV for the project? 2) Should you accept the project (assuming you accept only profitable projects)? Atlanta Cookie (A Cookie) wishes to purchase a cookie making system that requires the purchase of a mixer costing $42,500 and an oven costing $35,000. This new cookie making system project is expected to meet the firm's growing demand for fabulous, fat- free cookies for the foreseeable future. The firm plans to use a 12% cost of capital to evaluate the project. The before tax annual cookie sales revenues over the life the project are shown in the following table: Year 1 2 3 4 Estimated Sales Revenue $70,000 $112.000 $160,000 $163,000 5 $92,000 It is expected that the system will have a zero salvage value and be depreciated straight line over its five-year life. The equipment is not expected to have a market value in five years. The company will get bank financing at a rate of 8% effective annual interest rate for the initial investment. After purchasing the new cookie making system, A Cookie will hire Emanuel Jackson to maintain, operate and train other employees on how to use the new equipment. Emanuel will require a salary and benefits totaling $70,000 per year. Emanuel previously worked for the consulting company that recommended this system to A Cookie. A Cookie paid Emanuel's firm $30,000 to determine which system was ideally suited for them. Flour, sugar butter and other ingredients are estimated to cost 20% of sales annually. The system is so terrific it is believed that A Cookie's baking process will become the industry standard and open new distribution channels, however, the initial cost of setting up these new distribution channels is estimated to be $50,000. The increases in sales from the new customers are incorporated in the estimated sales revenue estimates above. The firm estimates that the project will require an increase in net working capital of $4,000, which will be recovered at the end of the life of the project. The company is in the combined 40% state and federal tax brackets. 1) What is the NPV for the project? 2) Should you accept the project (assuming you accept only profitable projects)?
Expert Answer:
Answer rating: 100% (QA)
To calculate the NPV of the project we need to calculate the cash flows for each year of the project and discount them back to their present value usi... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Ques 1: What is the major complaint by firms concerning the Sarbanes-Oxley act of 2012? A. the legislative maximum allowable compensation for a CEO. B. the legal requirement to disclose project...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Asset allocation explains a large portion of a portfolio return. However, the implementation issues involved inthe asset allocation process may reduce the efficiency of the asset allocation strategy,...
-
Determining a cash flow annuity with income tax considerations Jay Welch is considering whether to invest in a computer game machine that he would place in a hotel his brother owns. The machine would...
-
An organizations non-market environment comprises all the relationships it has beyond the market but which nevertheless affect its ability to reach its objectives. Issues in this environment are...
-
Quilts R Us (QRU) is considering investing in a new patterning attachment with the cash flow profile shown in the table below. QRU's MARR is 13.5 percent/year. a. What is the internal rate of return...
-
Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000. The machine should save the company approximately $70,000 in operating costs per year over its estimated...
-
A 6-month bank loan of $1,000.00 required the equal payments monthly. After three payments were made, the borrower decided to pay off the loan at the 4th month before he paid his monthly payment. The...
-
The following transactions of Carswell Wholesale Inc. occurred in the month of September 2016: Date: Sept. 1Issued 200 common shares for $20,000. 4 To raise additional capital, Carswell borrowed...
-
J.LO Manufacturing can produce a maximum of 3530 tablets per month and sell them for $121 each. The company's fixed costs per month are $46,596, and the variable costs are $88 per unit. a) Calculate...
-
The FX market for Hong Kong dollars (HK$) relative to US dollars (US$), where the HK$ is pegged to the US$. Is the HK$ over or undervalued relative to the US$ and how would the central bank maintain...
-
1. According to Sylvia Clark's article on mariachi music, "Mariachi Music as aSymbol of Mexican Culture in the United StatesDownload Mariachi Music as aSymbol of Mexican Culture in the United...
-
News for First-Time Homebuyers The sales of residential homes are at their lowest, forcing the government to take action to try to restore consumer confidence. The poor economy in America is having a...
-
In digital advertising and marketing for healthcare and wellness, visual content is widely utilized and shared. A way to create visual design with written content through infographics. Some health...
-
028. A student holding two weights close to his chest is sitting on a frictionless chair; the student and chair are rotating with an angular speed of 10 rad/s. The rotational inertia of Student +...
-
CS5 You are engaged in the first-time audit of the financial statements of Trina Claire Co, which began operations in 2015. The following ratios and other data pertaining to the financial statements...
-
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.78 and Kr 5.86, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate...
-
Give an example of a responsibility center that is properly treated as a cost center.
-
What is a line of credit? How is it useful to a small organization?
-
Group technology and processing cycle efficiency Ray Brown??s company, Whisper Voice Systems, is trying to increase its processing cycle efficiency (PCE). Because Ray has a very limited budget, he...
-
Whenever Aliza buys a flashlight, she also always buys exactly two batteries along with it. Any more than two batteries will serve no purpose, because she will not be able to use them in the...
-
State governments in India levy a value-added tax on the sale of goods. The rate of this sales tax varies by type of good and by state. In Maharashtra, the general rate of sales tax is \(12.5 \%\),...
-
Divit enjoys watching team sports and considers tickets to kabaddi and badminton games to be perfect substitutes. Show his preference map. What is his utility function?
Study smarter with the SolutionInn App