Drillmaster Sdn Bhd has developed a powerful new hand drill that would be used for woodwork...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Drillmaster Sdn Bhd has developed a powerful new hand drill that would be used for woodwork and carpentry activities. It would cost $1 million to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to 10% of sales. It would take 1 year to buy the required equipment and set up operations, and the project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years. The firm believes it could sell 1,000 units per year. The drills would sell for $240 per unit, and Webmasters believes that variable costs would amount to $175 per unit. The company's non-variable costs would be $100,000 at Year 1 and would increase with inflation. After the first year the sales price and variable costs will increase at the inflation rate of 3%. The equipment would be depreciated over a 5-year period, using the straight-line method. The estimated market value of the equipment at the end of the project's 5-year life is $100,000. The tax rate is 25%. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. b. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables' values at 20% above and below their base- case values. Include a graph in your analysis. c. Conduct a scenario analysis. Assume that there is a 30% probability that best-case conditions, with the sales price, number of units sold, variable costs per unit and fixed cost being 20% better than its base-case value. There is a 30% probability of worst-case conditions, with the variables 20% worse than base value. The base case condition is assumed to have a 40% probability. What would be the project's coefficient of variation NPV? d. On the basis of information in the problem, would you recommend that the project be accepted? Drillmaster Sdn Bhd has developed a powerful new hand drill that would be used for woodwork and carpentry activities. It would cost $1 million to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to 10% of sales. It would take 1 year to buy the required equipment and set up operations, and the project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years. The firm believes it could sell 1,000 units per year. The drills would sell for $240 per unit, and Webmasters believes that variable costs would amount to $175 per unit. The company's non-variable costs would be $100,000 at Year 1 and would increase with inflation. After the first year the sales price and variable costs will increase at the inflation rate of 3%. The equipment would be depreciated over a 5-year period, using the straight-line method. The estimated market value of the equipment at the end of the project's 5-year life is $100,000. The tax rate is 25%. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. b. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables' values at 20% above and below their base- case values. Include a graph in your analysis. c. Conduct a scenario analysis. Assume that there is a 30% probability that best-case conditions, with the sales price, number of units sold, variable costs per unit and fixed cost being 20% better than its base-case value. There is a 30% probability of worst-case conditions, with the variables 20% worse than base value. The base case condition is assumed to have a 40% probability. What would be the project's coefficient of variation NPV? d. On the basis of information in the problem, would you recommend that the project be accepted?
Expert Answer:
Answer rating: 100% (QA)
ANNUAL DEPRECIATION 10000001000005180000 Present ValuePV of Cash FlowCash Flow1iN idiscount rateRequired Return1001 NYear of Cash Flow BASE CASE SCENA... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1337909747
7th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Posted Date:
Students also viewed these accounting questions
-
Determine the critical values that would be used for the following hypothesis tests (using the classical approach) about the difference between two means with population variances unknown. Ha: -. >...
-
a. Measure all the voltages and currents indicated. - Note that elements are connected in parallel. Follow best practices covered in the lecture for parallel connection of elements to one point. b....
-
Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would cost $10 million to purchase the equipment necessary to manufacture the server,...
-
Calculate the following ratios from the data given below: 1. Debt ratio 2. Debt service coverage multiples 3. Interest coverage Balance Sheet 12/31/2014 Assets Cash..$575,000 Short-term...
-
Use the same facts as in problem 14, but assume instead that Arturo pays cash of $4,200,000 to acquire Westmont. No stock is issued. Prepare Arturos journal entry to record its acquisition...
-
The following information (in millions) was taken from the December 31 financial statements of Canadian National Railway Company: Instructions a. Calculate the 2019 and 2018 current ratios. b....
-
Write a program using the programming language of your choice to implement the representation you designed for Review Question 3.3. Have your program solve the problem, and have it show on the screen...
-
Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in...
-
1. What was the basis of this case? What does the employee(s) allege happened? What does management/the organization allege? Please remember to use the word allege. 2. What are additional...
-
A B D F Dayton, Inc. Annual Income Statement (Values in Millions) Common Size 2012 2011 2012 2011 Sales $ 178,909 $ 187,510 Cost of Sales 111.631 Gross Operating Profit Selling, General & Admin....
-
The value of salaries and wages for the first month amounted to $1,000. The exhibition insurance premium for the first month has been settled. The company obtained the amount of 50 dollars through...
-
If the base rate of an hourly worker is 8.80 per hour and the employee worked 47 hours during the week, calculate his gross pay is overtime is paid at time and a half.
-
On 1/1/2013, the Arab Creatives Company for the manufacture of carpets and rugs purchased 80% of the shares of Al-Izdihar Cardboard Factory at a cost of 200,000 dinars. The net fair value of the...
-
How does the self-determination theory explain the relationship between intrinsic and extrinsic motivation, and how can this understanding be applied to improve motivation in educational settings?
-
1. From your chief executive: How does a fl exible benefi ts scheme work and how would we benefi t from introducing one? 2. From the fi nance director: I am sure most of our employees do not...
-
Mohiam Publishing produces paperback books and had the following information available when 8,400 units were made: Administrative wages $29,400 Wages for factory workers 16,800 Paper 7,700 Rent on...
-
Related to Security and safety System for Bank, prepare a quality measurement plan which includes the metrics used for measuring the project like defect density, defect fix rate, and test case...
-
Copy and complete the statement. 3800 m ? km =
-
Maggies Muffins Bakery generated $5 million in sales during 2019, and its year-end total assets were $2.5 million. Also, at year-end 2019, current liabilities were $1 million, consisting of $300,000...
-
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales...
-
At year-end 2019, Wallace Landscapings total assets were $2.17 million, and its accounts payable were $560,000. Sales, which in 2019 were $3.5 million, are expected to increase by 35% in 2020. Total...
-
If the 3-in.-diameter short rod is made from brittle material having an ultimate strength of \(\sigma_{\text {ult }}=60 \mathrm{ksi}\), for both tension and compression, determine if the shaft fails...
-
If the 3-in.-diameter shaft is made from cast iron having tensile and compressive ultimate strengths of \(\left(\sigma_{\mathrm{ult}} ight)_{t}=40 \mathrm{ksi}\), and \(\left(\sigma_{\mathrm{ult}}...
-
The shaft consists of a solid segment \(A B\) and a hollow segment \(B C\), which are rigidly joined by the coupling at \(B\). If the shaft is made from A-36 steel, determine the maximum torque \(T\)...
Study smarter with the SolutionInn App