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Problem 10. (SHOW AND LABEL ALL CALCULATIONS)

New Ventures Enterprises Inc. is considering a proposal to invest 600,000 in new Cell Telephone Product. production equipment which will be depreciated on a straight-line basis with a 6-year life, and no salvage value. The projected annual revenues and costs of the new product that will be produced from the equipment are:

Sales $565,000

Variable Manufacturing costs $100,000

Variable selling and administrative $74,000

Fixed Costs: In-Direct Labor $150,000

Fixed Manufacturing costs $52,500

Income tax expense rate is 15%

Periods (n) 3 4 5 6 Present Value of an Annuity of $1.00 Table 8% 9% 10% 11% 12% 15% 18% 20% 24% 2.5771 2.5313 2.4869 2.4437 | 2.4018 2.2832 2.17432.1065 1.9813 3.3121 3.2397 3.1699 3.1025 3.0374 2.8550 2.6901 2.5887 2.4043 3.9927 3.8897 | 3.7908 3.6959 3.6048 3.3522 3.1272 2.9906 2.7454 4.6229 4.4859 4.3553 4.2305 4.1114 3.7845 3.49763.3255 3.0205 5.2064 5.0330 4.8684 4.7122 4.56384.1604 3.8115 3.6046 | 3.2423 5.74665.5348 5.3349 5.1461 4.9676 4.4873 4.0776 3.8372 3.4212 6.2469 5.9953 5.7590 5.5371 5.3283 4.7716 4.3030 4.0310 3.5655 7 8 9 1. Develop and document a multi-step Income Statement that includes Sales, Cost of Goods Sold, Gross Profit, Fixed Expenses, Operating Income, Income Tax Expense and Net Income Income Statement Sales 565,000 Cost of goods sold: Variable manufacturing cost (100,000) Variable Sales and Administrative expenses (74,000) (174,000) Gross profit 391,000 Fixed expenses: Indirect labor (150,000) Fixed manufacturing costs (52,500) Depreciation (600,000 = 6) (100,000) (302,500) Operating income 88,500 Income tax expense at 15% of operating (13,275) income Net income 75,225 2. Showing and labeling all calculations, compute the following capital budgeting metrics: (a) Compute the annual rate of return. Average net profits $75,225 Investment $600,000 Annual rate of return ($75,225 + $600,000) 12.54% (b) Compute the cash payback period. Net income 75,225 Depreciation Cash flow after tax (75,225 + 100,000) 100,000 175,225 Initial investment 600,000 175,225 Annual cash flow Payback Period (years) (600,000 = 175,225) 3.42 (c) Compute the net present value assuming a 10% required rate of return. Net cash flow X 10% Discount factor = Present value Year 0 1 2 3 4 5 6 Net Cash Flow (600,000) 175,225 175,225 175,225 175,225 175,225 175,225 10% Discount Factor 1.00000 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 Net Present Value Present Value $ (600,000) 159,295 144,814 131,649 119,681 108,801 98,910 $ 163,150 (d) Determine the estimated internal rate of return. (e) Provide a written evaluation that explains and supports your decision as to whether or not New Ventures Enterprises Inc. should invest in building the new Cell Phone product? Specifically, refer to your calculations in parts (a) through (d) above. |