GER 2000 Lecture Notes - Lecture 6: Critical Path Method

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redsea-lion177

7 Feb 2019

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A project to build a new bridge seems to be going very well since the project is well ahead of schedule and costs seem to be running very low. A major milestone has been reached where the first two activities have been totally completed and the third activity is 60 percent complete. The planners were only expecting to be 50 percent through the third activity at this time. The first activity involves prepping the site for the bridge. It was expected that this would cost 420 000 and it was done for only 300: the second activity was the pouring of concrete for the bridge. 000 but was actually done for 000 000. The third and final activity is the actual construction of the bridge superstructure. This was expected to cost a total of 500 000. Calculate the schedule variance, schedule performance index, and cost index for the project to date.

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Dalton Ltd â a manufacturer of high quality JoJo tanks â has maintained stable annual sales of $500 000 for the past two years and is expected to remain stable for the next 5 years. Although the market for JoJo tanks has been expanding, Dalton Ltd could not share in this growth due to the technical problems experienced with the current machine. To increase its production and sales, the company is considering replacing the current injection moulding machine with a more technically advanced model which will cost the company $3 000 000.The outlay would be offset partially by the sale of the old machine. The old machine cost $1 500 000 two years ago and can be sold currently for $500 000 before tax. The lifespan of the old machine was originally six years and depreciation is calculated on a straight line basis. The total fixed operating costs for the old machine is $80 000 (excluding depreciation) and will be constant for the next five years.As a result of the acquisition of the new machine, sales are expected to increase by 5 000 units in each of the next three years and to stabilise in the following two years. The new injection moulding machine will be depreciated on a straight-line basis over five years and will be terminated and sold at end of the fifth year for a scrap value of $600 000.The company is currently selling 25 000 tanks annually. The total fixed operating costs of $120 000 (including depreciation) will be constant for the next five years. Variable cost per unit per year total R5.As a result of switching to the new machine management expects cash to increase by $20 000, accounts receivable by $40 000 and inventory by $60 000. At the same time, accounts payable will increase by $50 000, accruals by $10 000 and long-term debt by $100 000.Dalton Ltd's cost of capital is 11%. Assume a tax rate of 29%.

1. The internal rate of return for the project would be closest to â¦ .

1. 8%

2. 11%

3. 14%

4. 17%

2. The net present value for the project is closest to â¦.

1. R876.91

2. R906.91

3. R930.91

4. R970.91

3. Calculate the number of units which must be sold in order to achieve a net profit before tax of R148 800 in the first year.

1. 14 920 units

2. 15 920 units

3. 16 920 units

4. 17 920 units

bronzeelk514

Q2.

Your project to obtain charitable donations is now 30 days into a planned 40-day project. The project is divided into 3 activities. The first activity is designed to solicit individual donations. It is scheduled to run the first 25 days of the project and to bring in $25,000. Even though we are 30 days into the project, we still see that we have only 90 percent of this activity complete. The second activity relates to company donations and is scheduled to run for 30 days starting on day 5 and extending through day 35. We estimate that even though we should have (25/30) percent of this activity complete, it is actually only 50 percent complete. This part of the project was scheduled to bring in $150,000 in donations. The final activity is for matching funds. This activity is scheduled to run the last 10 days of the project and has not started. It is scheduled to bring in an additional $50,000. So far $175,000 has actually been brought in on the project.

Calculate the schedule variance, schedule performance index, and cost (actually revenue in this case) variance and cost (actually revenue here) performance index. How is the project going?
Hint:Note that this problem is different since revenue rather than cost is the relevant measure. Use care in how the measures are interpreted.

yellowweasel220

Mills Mining Corporation, a firm in the 35 percent marginal tax bracket with a 12% percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. Because the product is considered to be a âfadâ, the project will be operational for only the next five years.

Â· The project requires an initial capital investment of $660,000. Shipping and installation will cost an additional $30,000.

Â· The capital investment will be depreciated using a 5-year MACRS schedule. The depreciation schedule is as follows: 20%; 32%; 19%; 12%; 11%; and 6%.

Â· If the project is undertaken, the company expects inventory and accounts receivable to increase by $90,000 and $45,000, respectively, and accounts payable to increase by $50,000.

Â· To project demand for this new product, the company has spent $250,000 in focus groups and pre-market testing.

Â· The project is expected to generate sales of 40,000 units in each the first and fifth years, 65,000 units in each the second and third years, and 55,000 units in the fourth year. The sales price per unit will be $12.

Â· Variable costs are expected to be $6.50 per unit. Additional operating costs (not including depreciation) will equal $52,500 a year.

Â· The firm expects to incur annual interest costs of $67,500.

The equipment is expected to have a salvage value (before-tax) of $30,000.

a. What are the cash flows associated with the project for each year?

b. What is the NPV of the project?

c. What is the internal rate of return on the project?

d. What is the regular payback period for the project?

e. Would you accept the project? Why or why not?

lemoneagle304

GER 2000 Lecture Notes - Lecture 6: Critical Path Method

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