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26 Apr 2018

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 12,000 units, ±4 percent. The expected variable cost per unit is $7 and the expected fixed costs are $36,000. The fixed and variable cost estimates are considered accurate within a ±6 percent range. The sales price is estimated at $14 a unit, ±5 percent. The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $39,000 at the end of the project. The project requires $11,200 in net working capital for the three years. The discount rate is 11 percent and tax rate is 34 percent What is the net income under the pessimistic case scenario? -$278.78 -$422.40 -$566.02 $3,554.50

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Irving Heathcote
Irving HeathcoteLv2
28 Apr 2018

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Miller Mfg. is analyzing a proposed project. The company expects to sell 12,000 units, plus or minus 3 percent. The expected variable cost per unit is $7.00 and the expected fixed cost is $35,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $31,000. The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 5 percent.
What is the net income under the worst-case scenario?

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 “fad”, the project will be operational for only the next five years.

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

· 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%.

· 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.

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

· 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.

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

· 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?

You are working on a bid to build four small apartment buildings a year for the next three years for a local community. This project requires the purchase of $900,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the three years. The equipment can be sold at the end of the project for $400,000. You will also need $200,000 in net working capital over the life of the project. The fixed costs will be $475,000 a year and the variable costs will be $140,000 per building. Your required rate of return is 12 percent for this project and your tax rate is 34 percent.

The minimal amount, rounded to the nearest $500 that you should bid per building is 341.500dollars.

*******IF you take the project by bidding an amount that is lower than the minimal amount 341.500;

What is the meaning of this?

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