S& P Corporation (SPC) is considering entering a new line of business. In analyzing the potential...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
S& P Corporation (SPC) is considering entering a new line of business. In analyzing the potential business, the financial staff has accumulated the following information: The new business will require a capital expenditure of $7 million at t = 0. This expenditure will be used to purchase new equipment. This equipment will be depreciated according to MACRS five-year class (see table on next page). The equipment will have a salvage value of $500,000 after five years. The required level of working capital is 7.5% of expected sales over the year: wC 7.5% Sales The new business is expected to have an economic life of five years, The Marketing Department forecasts to sell 300,000 units during the first year and then 400,000 units thereafter. The expected price is $10 per unit during the first year. Price must be adjusted by inflation in subsequent years. Variable cost is expected to be $5.50 per unit whereas fixed cost is $100,000. These figures must be adjusted by inflation in subsequent years. The new product is expected to increase before-tax cash flows of the company's existing products by $300,000 per year in real terms. This amount also has to be adjusted by inflation, The expected inflation rate during the life of the project is 2% per year. The company's interest expense each year will be $220,000. The company's tax rate is 26%. The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden. The company's cost of capital (WACC) is 7.90%. However, the proposed project is riskier than the average project for SPC and therefore you have to add 2% to the corporate cost of capital. The company's CFO wants you to analyze the project and to write a short report with your recommendation. Please be advised that both financial and non-financial managers will read the report3; therefore, make sure you explain your calculations and recommendation. MACRS 5-year class Depreciation Year Rates 0.20 2. 0.32 0.19 4. 0.12 5 0.11 6. 0.06 S& P Corporation (SPC) is considering entering a new line of business. In analyzing the potential business, the financial staff has accumulated the following information: The new business will require a capital expenditure of $7 million at t = 0. This expenditure will be used to purchase new equipment. This equipment will be depreciated according to MACRS five-year class (see table on next page). The equipment will have a salvage value of $500,000 after five years. The required level of working capital is 7.5% of expected sales over the year: wC 7.5% Sales The new business is expected to have an economic life of five years, The Marketing Department forecasts to sell 300,000 units during the first year and then 400,000 units thereafter. The expected price is $10 per unit during the first year. Price must be adjusted by inflation in subsequent years. Variable cost is expected to be $5.50 per unit whereas fixed cost is $100,000. These figures must be adjusted by inflation in subsequent years. The new product is expected to increase before-tax cash flows of the company's existing products by $300,000 per year in real terms. This amount also has to be adjusted by inflation, The expected inflation rate during the life of the project is 2% per year. The company's interest expense each year will be $220,000. The company's tax rate is 26%. The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden. The company's cost of capital (WACC) is 7.90%. However, the proposed project is riskier than the average project for SPC and therefore you have to add 2% to the corporate cost of capital. The company's CFO wants you to analyze the project and to write a short report with your recommendation. Please be advised that both financial and non-financial managers will read the report3; therefore, make sure you explain your calculations and recommendation. MACRS 5-year class Depreciation Year Rates 0.20 2. 0.32 0.19 4. 0.12 5 0.11 6. 0.06
Expert Answer:
Answer rating: 100% (QA)
Capital Expenditure at t0 700 million Tax Rate26 A B CAB D EAD ... View the full answer
Related Book For
Managerial economics
ISBN: 978-1118041581
7th edition
Authors: william f. samuelson stephen g. marks
Posted Date:
Students also viewed these accounting questions
-
The Helicon Company is considering entering a new line of business. Starting the business will require an initial investment equipment of $500,000. It is expected that the new business will increase...
-
A pants maker is designing a new line of pants called the Redbird. The pants will sell for $325 per pair and cost $260 per pair in variable costs to make. (1) Compute the contribution margin per...
-
A food-products company has recently introduced a new line of fruit pies in six U.S. cities: Atlanta, Baltimore, Chicago, Denver, St. Louis, and Fort Lauderdale. Based on the pies apparent success,...
-
Give a recursive algorithm for finding the reversal of a bit string. (See the definition of the reversal of a bit string in the preamble of Exercise 34 in Section 5.3.)
-
A female attorney was an associate at a law firm. Soon after she began working at the firm, the managing partner learned that she had a young child. The partner said that he was upset because she had...
-
Following is a list of information for Peter and Amy Jones for the current tax year. Peter and Amy are married and have three children, Aubrynne, Bryson, and Caden. They live at 100 Main Street,...
-
If the prices of goods, services, and housing increase, must the Consumer Price Index increase? Explain.
-
The budget for the Baldwin Equipment, Inc. job in P9-1 consisted of the following amounts: Partners salary and overhead . . . . . . . . . . . . . $6,300 Associates salary and overhead . . . . . . . ....
-
Make sure you have run the necessary libraries in R: library(haven) library(tidyverse) library(stargazer) 1a). Preliminary data manipulation (5 points) Investigate the AGE_12 variable...
-
In a survey, adults were asked to answer yes or no to the question Do you regularly watch the evening TV news? Some of the results from the survey are detailed in the Venn diagram opposite. One adult...
-
You internalize critical thinking concepts, models, and theories, what do you want to understand about being a fair-minded critical thinker when you leave this class that you can use in the real...
-
How is the profit margin ratio calculated?
-
What are the cost centers in responsibility reports?
-
List three items whose knowledge is required to create the flexible budget.
-
List three criteria present in variable costs.
-
What does transfer price refer to?
-
Congress and the president raise income taxes while at the same time the Fed increases the money supply. The initial equilibrium in the money market, prior to any such policy change, occurs where the...
-
Michelles trust is subject to 3.8% surtax on the lesser of the trusts net investment income or the excess of the trusts adjusted gross income over the $12,400 threshold (the highest trust tax rate)....
-
The following payoff table depicts service competition between two hospitals in a southeastern city. (Each payoff represents profit in millions of dollars.) a. Does either hospital have a dominant...
-
a. Average back the decision tree below, supplying expected monetary values for points A through E. b. One of your fellow managers is worried that there are no probabilities given for the branches...
-
A water expert was asked whether increased water consumption in a California community was lowering its water table. To answer this question, the expert estimated a linear regression equation of the...
-
UNeedit Sports Store, a business owned by Penny Needham, had the following assets and liabilities as at the financial years ended 30th June, 20X1 and 20X2: Required: a What is the owners equity at...
-
Identify whether the following liabilities would be classified as current or non-current at the end of the reporting period. Explain your classification decision. a GST collected b Loan payable in...
-
From the following account balances of Josland at 31 December 20X2 prepare a balance sheet in both T-format and narrative classified format. Cash at bank $113 500 Accounts receivable (net) 52 400...
Study smarter with the SolutionInn App