Use the following information to answer all questions: Management of XYZ is considering investing in a new
Question:
Use the following information to answer all questions: | |||
Management of XYZ is considering investing in a new business line for producing a new product. The following data are relevant to the business line: | |||
1 | Business line machinery will cost $1,000,000 and have 10 years of useful life and requires $50,000 maintenance annually | ||
2 | The line will have a normal capacity to produce 100,000 units annually | ||
3 | The line will be based in a factory rented and used by XYZ at $100,000 of which 40% will be allocated and charged to the business line. | ||
4 | Below are the materials used in producing the product: | ||
Quantity | Cost | ||
RM1 | 0.1 KG | $200 per KG | |
RM2 | 1 piece | $100 per box of 20 pieces | |
5 | Salaries are paid as follows: | ||
Head office salaries | $100,000 | annually | |
Factory labor | $200,000 | annually | |
Sales staff | $120,000 | annually | |
6 | XYZ will charge the business line $50,000 annually for Administration services (such as accounting, HR and other service) | ||
7 | At the end of year 5, the business line will be closed and the machinery will be sold to a third party for $450,000 | ||
8 | The investment and required working capital will be financed with 60% equity and 40% debt. | ||
9 | The new line is planned to produce and sell 50,000 units in year 1, and 60,000 units in year 2 growing by 10% for the remaining years | ||
10 | The selling price for the product will be $50 per unit expected to rise by 10% starting year 3 | ||
11 | Raw materials are imported from a foreign country and their prices are expected to increase by an annual inflation rate of 7% | ||
12 | Working Capital: | ||
Sales are 20% cash and 80% credit due within 60 days | |||
Raw Material purchases are made on credit due within 30 days | |||
Factory rent is paid in advance on December 31 of each year | |||
13 | The company's dividend policy is 40% of net profit starting year 2 for this project (i.e. no dividend on year 1 net profit) | ||
14 | The cash balance should be a minimum of 100,000 | ||
15 | Debt to be paid over 2 years |
Total assets by the end of year 1:
a.1.440.000
b.2.094.877
c.1.123.673
d.1.841.417
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen