Cambridge Office Furniture is weighing a proposal to manufacture and sell a new line of products...

  

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Cambridge Office Furniture is weighing a proposal to manufacture and sell a new line of products aimed at the home office market. It would feature a number of modular components such as computer desks, file cabinets, bookshelves, and desk chairs in four popular finishes selected to go well with typical suburban decors. Although the units would sell for different prices, they could all be manufactured in the same facility using the same equipment. They would have similar markups and cost structures. If the office furniture project is accepted, Cambridge will stop selling a computer desk that is similar to a desk in the new product line. The existing desk contributes about $550,000 per year to operating cash flow, and sales of this desk have been projected to be flat. X Cost Analysts have collected the data given here and submitted it to the Treasurer's Office for additional study and a final decision on whether or not to proceed. You, as Assistant to the Treasurer, have been asked to compute and evaluate basic capital budgeting criteria. The project will initially increase net working capital by $160,000, which will be recovered at the end of the project when remaining inventory is sold and accounts receivable are collected. The analysts are not quite sure if they should include $150,000 already spent for designs and prototypes in the investment for the new project. They also disagree about whether the effect of the discontinued desk on the company's overall operating cash flows is relevant to the decision on the new project line. So, you will need to decide how to deal with these two items. Information relevant to this project includes the following: C Description Cost of new plant and equipment Estimated disposal value of plant and equipment Design and prototypes expenditure Estimated salvage value, end of Year Five First-year sales forecast Projected annual rate of sales increase Cost of Goods Sold Selling, General, and Administrative Expenses Annual Fixed Costs Operating cash flow from current desk sales Economic life of the project Initial change in net working capital Depreciation Tax rate Discount rate or weighted cost of capital V G BO H N J M K < L Cost $8,000,000 $800,000 $150,000 $800,000 $5,500,000 6% 40% of Sales 5% of Sales 5 years $160,000 5-year MACRS 34% 9% . $200,000 $550,000 1 Enter Home 4 L 5 Alt 2. What is the cash flow resulting from disposal of the equipment at the end of the project? 3. Compute a schedule of the annual depreciation expense for the plant and equipment, using the MACRS 5-year life, as noted in the chart above. (Hint: The MACRS depreciation rates appear on Slide #44 of the "Supplemental Appendix A for Chapter 3: Current Rules for Depreciation" Powerpoint file. The MACRS depreciation rates are also posted in an Excel File to the "Content" link at our course Web site, under the "Chapter 3" heading and the "Cambridge Office Furniture Case Study" heading.) Alt Ctrl Pg Up Shift 1 End 0 2 24 3 Pg On Enter 4. Compute a schedule of annual operating cash flows for Cambridge's new product line, including the effect of the discontinued computer desk. a. Compute the project's Net Present Value (NPV). b. Should the proposed project be accepted or rejected? Why? 3 5. Re-compute the schedule of annual operating cash flows for Cambridge's new product line, including the effect of the discontinued computer desk, now assuming that sales grow at a 2% annual rate. a. Calculate the project's NPV at this 2% rate of growth in sales. b. Would the project now be accepted or rejected? Why? Cambridge Office Furniture is weighing a proposal to manufacture and sell a new line of products aimed at the home office market. It would feature a number of modular components such as computer desks, file cabinets, bookshelves, and desk chairs in four popular finishes selected to go well with typical suburban decors. Although the units would sell for different prices, they could all be manufactured in the same facility using the same equipment. They would have similar markups and cost structures. If the office furniture project is accepted, Cambridge will stop selling a computer desk that is similar to a desk in the new product line. The existing desk contributes about $550,000 per year to operating cash flow, and sales of this desk have been projected to be flat. X Cost Analysts have collected the data given here and submitted it to the Treasurer's Office for additional study and a final decision on whether or not to proceed. You, as Assistant to the Treasurer, have been asked to compute and evaluate basic capital budgeting criteria. The project will initially increase net working capital by $160,000, which will be recovered at the end of the project when remaining inventory is sold and accounts receivable are collected. The analysts are not quite sure if they should include $150,000 already spent for designs and prototypes in the investment for the new project. They also disagree about whether the effect of the discontinued desk on the company's overall operating cash flows is relevant to the decision on the new project line. So, you will need to decide how to deal with these two items. Information relevant to this project includes the following: C Description Cost of new plant and equipment Estimated disposal value of plant and equipment Design and prototypes expenditure Estimated salvage value, end of Year Five First-year sales forecast Projected annual rate of sales increase Cost of Goods Sold Selling, General, and Administrative Expenses Annual Fixed Costs Operating cash flow from current desk sales Economic life of the project Initial change in net working capital Depreciation Tax rate Discount rate or weighted cost of capital V G BO H N J M K < L Cost $8,000,000 $800,000 $150,000 $800,000 $5,500,000 6% 40% of Sales 5% of Sales 5 years $160,000 5-year MACRS 34% 9% . $200,000 $550,000 1 Enter Home 4 L 5 Alt 2. What is the cash flow resulting from disposal of the equipment at the end of the project? 3. Compute a schedule of the annual depreciation expense for the plant and equipment, using the MACRS 5-year life, as noted in the chart above. (Hint: The MACRS depreciation rates appear on Slide #44 of the "Supplemental Appendix A for Chapter 3: Current Rules for Depreciation" Powerpoint file. The MACRS depreciation rates are also posted in an Excel File to the "Content" link at our course Web site, under the "Chapter 3" heading and the "Cambridge Office Furniture Case Study" heading.) Alt Ctrl Pg Up Shift 1 End 0 2 24 3 Pg On Enter 4. Compute a schedule of annual operating cash flows for Cambridge's new product line, including the effect of the discontinued computer desk. a. Compute the project's Net Present Value (NPV). b. Should the proposed project be accepted or rejected? Why? 3 5. Re-compute the schedule of annual operating cash flows for Cambridge's new product line, including the effect of the discontinued computer desk, now assuming that sales grow at a 2% annual rate. a. Calculate the project's NPV at this 2% rate of growth in sales. b. Would the project now be accepted or rejected? Why?

Answer rating: 100% (QA)

ANSWER 1 Calculation of the initial investment Cost of new plant and equipment 8000000 Design and prototypes expenditure 150000 Initial change in net ... View the full answer