64.
The market price for low-end laser printers is well established at $400 per unit. ABC
Technologies is considering entering this market and has enough available space in its
plant to accommodate a new production line. However, several pieces of new
manufacturing equipment would be required which are estimated to cost $28,000,000.
ABC Technologies requires a minimum ROI of 15% on any product line investment and
estimate that it can capture 100,000 units of the low-end laser printer market at the
prevailing market price.
(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end
laser printer market while earning the minimum 15% ROI.
16–42
65.
The following product line information is for the Swiss Watch Company. The company is
considering dropping its Children’s product line due to poor operating income
performance. Fixed expenses are allocated to each product line based on sales revenue.
Watch Products
Men’s
Women’s
Children’s
Sales
$30,000
$50,000
$40,000
Variable
expenses
10,000
15,000
25,000
Fixed
expenses
15,000
25,000
20,000
Operating
income
$5,000
$10,000
$(5,000)
(a.) Calculate the effect on the Swiss Company’s operating income if the Children’s watch
product line is discontinued. Comment on your analysis.
(b.) Assume that Swiss Company discontinues its Children’s product line. Calculate the
total operating income for the Swiss Company.
Loss of contribution margin
66.
Marshall, Inc., produces three products but weekly demand for the three products exceed
the available amount of machine time. Following is information about each product:
Product
A
Product
B
Product
C
Contribution
margin per unit
$300
$400
$150
Machine hours
per unit
3
2
0.50
Weekly demand
(units)
100
300
800
(a.) Determine how many units each of Product A, Product B, and Product C that
Marshall, Inc., should produce each week assuming 1,000 hours of available machine time.
Contribution
Machine hours
per unit
3
Weekly demand
16–46
67.
Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions.
(a.) What is the present value of $100,000 in ten years using a discount rate of 8%?
(b.) How much should be invested today at a return on investment of 16% compounded
annually to have $60,000 in ten years?
68.
Use the appropriate factors from Table 6 – 4 or Table 6 – 5 to answer the following
questions.
(a.) Yoko Co.’s common stock is expected to have a dividend of $3 per share for each of
the next four years, and it is estimated that the market value per share will be $42 at the
end of four years. If an investor requires a return on investment of 12%, what is the
maximum price the investor would be willing to pay for a share of Yoko Co. common stock
today?
(b.) Lashana bought a bond with a face amount of $1,000, a stated interest rate of 10%,
and a maturity date 20 years in the future for $1,025. The bond pays interest on a semi–
annual basis. Five years have gone by and the market interest rate is now 12%. What is
the market value of the bond today?
69.
Use the appropriate factors from Table 6 – 4 or Table 6 – 5 to answer the following
questions.
(a.) What is the present value of $90,000 to be received in six years using a discount rate
of 12%?
(b.) How much should be invested today at a return on investment of 16% compounded
annually to have $150,000 in eleven years?
16–49
70.
Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following question.
(a.) ABC Co.’s common stock is expected to have a dividend of $8 per share for each of
the next six years, and it is estimated that the market value per share will be $78 at the
end of six years. If an investor requires a return on investment of 10%, what is the
maximum price the investor would be willing to pay for a share of ABC Co. common stock
today?
(b.) Gregory bought a bond with a face amount of $1,000, a stated interest rate of 12%,
and a maturity date 20 years in the future for $980. The bond pays interest on a semi–
annual basis. Eight years have gone by and the market interest rate is now 8%. What is the
market value of the bond today?
16–50
71.
The following data have been collected by capital budgeting analysts at Condel Brothers
Oil Co. concerning the drilling and production of known reserves at an off-shore location:
Investment in rigging equipment
and related personnel costs
required to pump the oil
$5,300,000
Net increase in inventory and receivables
associated with the drilling and production of the
reserves. Assume this investment will be
recovered at the end of the project 1,200,000
Net cash inflow from operations for
the expected life of the reserves
for years:
Year 1
2,000,000
Year 2
3,600,000
Year 3
1,700,000
Salvage value of machinery and
equipment at the end of the well’s
productive life
1,000,000
Cost of capital
18%
(a.) Calculate the net present value of the proposed investment in the drilling and
production operation. Ignore income taxes, and round answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.
72.
Griffin Co. is considering the investment of $136,000 in a new machine. The machine will
generate cash flow of $22,500 per year for each year of its eight-year life and will have a
salvage value of $8,000 at the end of its life. Griffin Co.’s cost of capital is 8 percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and
round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.
16–53
73.
The following data have been collected by capital budgeting analysts at Erica, Inc.
concerning a new product line currently under consideration by management:
Investment in machinery and
equipment required to produce the
product
$3,500,000
Net increase in working capital
associated with the new product.
Assume that this investment will
be recovered at the end of the
project
500,000
Net cash inflow from operations
for the expected life of the product
line for:
Year 1
550,000
Year 2
900,000
Year 3
1,400,000
Year 4
1,800,000
Salvage value of machinery and
equipment at the end of the
product line’s life
300,000
Cost of capital
10%
(a.) Calculate the net present value of the proposed investment in the new product line.
Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.