The Ebitts Field Corp. manufactures baseball gloves. Charlie Botz, the companys top salesman, has recommended expanding into
Question:
The Ebitts Field Corp. manufactures baseball gloves. Charlie Botz, the company’s top salesman, has recommended expanding into the baseball bat business. He has put together a project proposal including the following information in support of his idea.
• New production equipment will cost $75,000 and will be depreciated straight line over five years.
• Overheads and expenses associated with the project are estimated at $20,000 per year during the first two years and $40,000 per year thereafter.
• There is enough unused space in the factory for the bat project. The space has no alternative use or value.
• Setting up production and establishing distribution channels before getting started will cost $300,000 (tax deductible).
• Aluminum and wood bats will be produced and sold to sporting goods retailers. Wholesale prices and incremental costs per unit (direct labor and materials) are as follows.
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• Charlie provides the following unit sales forecast (000).
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The sixth year sales level is expected to hold indefinitely.
• Receivables will be collected in 30 days, inventories will be the cost of one month’s production, and payables are expected to be half of inventories. Assume no additional cash in the bank or accruals are necessary.
• Ebitts Field’s marginal tax rate is 35% and its cost of capital is 12%.
a. Develop a six-year cash flow estimate for Charlie’s proposal. Work to the nearest $1,000.
b. Calculate the payback period for the project.
c. Calculate the project’s NPV assuming a six-year life. Is the project acceptable?
d. Is the cost of capital an appropriate discount rate for the project considering its likely risk relative to that of the rest of the business? Why?
e. What is the project’s NPV if the planning horizon is extended to eight years?
f. What is the NPV if management is willing to look at an indefinitely long time horizon?
g. Comment on the results of parts (e) and(f).
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
a Initial Outlay Expenses after tax 300 65 195 Equipment 75 270 b c d Yes The project is in the firm...View the full answer
