TECA Ltd is a Canadian company established in 2000 with one manufacturing| facility in Vancouver, British...
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TECA Ltd is a Canadian company established in 2000 with one manufacturing| facility in Vancouver, British Columbia. The company innovates, develops, and produces high quality wool carpets. The company employs 200 employees. It currently distributes its products across Canada and USA. The company has heavily invested in research and development (R&D) to expand their product offerings. TECA is focused on supporting the communities where it lives and work and committed to meeting the continued sustainability challenges. Management at TECA is currently considering the introduction of a new production line to allow the use of a new technology to produce easy-clean carpets based on wool and polypropylene blends. Market research carried out to date at a cost of 200,000 indicates that the easy-clean carpet is the new generation in the market and attracts high demand due to improved quality. The company will hire new staff and incur staff costs of 1,000,000 per annum for a period of 5 years. The new production line will cost 4,800,000 with an anticipated economic life of 5 years and a scrap value of 800,000. The new product will be launched with global advertising campaign and will cost 600,000 per year in the first year of operation and then 300,000 per year for the following four years. Forecasted financial information over the subsequent 5 years for the new plant is presented in the following table: Annual sales (units) Sales price per unit Cost of material per unit Variable overhead per unit 30,000 750 450 150 Annual depreciation charges 800,000 Other annual fixed overhead 1,000,000 The company's policy is to depreciate investment costs over the economic life of the investment using the straight-line method. The company's threshold for the payback period is 2.5 years and for the accounting rate of return is 35%. TECA is currently financed by a mix of equity and long-term debt with an estimated cost of capital of 14%. Required: a. Calculate the annual profit and net cash flow from the new investment over its useful life. b. Using the Accounting Rate of Return, Payback Period, Net Present Value, and the Internal Rate of Return methods evaluate the value of the new investment and recommend whether it is a viable investment for Smart Carpet Ltd. c. Evaluate the sensitivity of the net present value of this investment to a 10% reduction in sales volume, a 5% reduction in sales price, and a 10% increase in material costs, individually and collectively, using Scenario Analysis. TECA Ltd is a Canadian company established in 2000 with one manufacturing| facility in Vancouver, British Columbia. The company innovates, develops, and produces high quality wool carpets. The company employs 200 employees. It currently distributes its products across Canada and USA. The company has heavily invested in research and development (R&D) to expand their product offerings. TECA is focused on supporting the communities where it lives and work and committed to meeting the continued sustainability challenges. Management at TECA is currently considering the introduction of a new production line to allow the use of a new technology to produce easy-clean carpets based on wool and polypropylene blends. Market research carried out to date at a cost of 200,000 indicates that the easy-clean carpet is the new generation in the market and attracts high demand due to improved quality. The company will hire new staff and incur staff costs of 1,000,000 per annum for a period of 5 years. The new production line will cost 4,800,000 with an anticipated economic life of 5 years and a scrap value of 800,000. The new product will be launched with global advertising campaign and will cost 600,000 per year in the first year of operation and then 300,000 per year for the following four years. Forecasted financial information over the subsequent 5 years for the new plant is presented in the following table: Annual sales (units) Sales price per unit Cost of material per unit Variable overhead per unit 30,000 750 450 150 Annual depreciation charges 800,000 Other annual fixed overhead 1,000,000 The company's policy is to depreciate investment costs over the economic life of the investment using the straight-line method. The company's threshold for the payback period is 2.5 years and for the accounting rate of return is 35%. TECA is currently financed by a mix of equity and long-term debt with an estimated cost of capital of 14%. Required: a. Calculate the annual profit and net cash flow from the new investment over its useful life. b. Using the Accounting Rate of Return, Payback Period, Net Present Value, and the Internal Rate of Return methods evaluate the value of the new investment and recommend whether it is a viable investment for Smart Carpet Ltd. c. Evaluate the sensitivity of the net present value of this investment to a 10% reduction in sales volume, a 5% reduction in sales price, and a 10% increase in material costs, individually and collectively, using Scenario Analysis.
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a Calculate Annual Profit and Net Cash Flow First lets calculate the annual profit and net cash flow for the new investment over its useful life of 5 ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I
Posted Date:
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