Compute the project cash flows in years

Assignment Help Financial Accounting

Reference no: EM132786423

Question - Angola Superheros, Inc. is considering launching a production of a new superhero toy. The production and sales are expected to last 4 years. The project would require a new machine, with a cost of $1,000,000. The machine would be depreciated using the straight-line method over 8 years to zero value after year 8. After 4 years, at the end of the project, the machine is expected to be sold for $30,000. The company estimates that 40,000 toys would be sold annually, at a selling price of $20 per unit. The variable cost of producing each unit is estimated to be $5. In addition, the company will have to pay fixed costs equal to $35,000 each year. The relevant cost of capital is 14%, and the company faces a 25% marginal tax rate.

Required -

a. Compute the project's cash flows in years 0-4, calculate the net present worth of the project and its internal rate of return, and determine whether the project should be accepted. Explain your answer.

b. Run a Monte Carlo simulation, varying the variable cost per unit, the annual fixed cost, and the number of units sold. Assume that the variable cost per unit has a mean of $5 and standard deviation of $0.20, that the annual fixed cost has a mean of $35,000 and standard deviation of $2,000, and that the number of units sold annually has a mean of 40,000 and standard deviation of 1,500, and that all three variables follow normal distribution. Compute the present worth of the project for 100 simulation runs. Based on the simulation results, compute the average net present worth and the threshold for the 5% of worst possible outcomes. Comment on the results, the uncertainty of the project's net present worth, and whether the project should be accepted.

Use the data table function to construct a table showing the net present worth of the project, while varying the selling price per unit and the cost of capital. Use the following selling prices in your table: 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25. Use the following cost of capital in your table: 9%, 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, and 19%. Comment on the sensitivity of the project's present worth to the cost of capital and the selling price per unit.

Reference no: EM132786423

Questions Cloud

Draw the structural formula of a compound : Draw the structural formula of a compound with each of the following molecular formulae that, on oxidation by chromic acid, gives the carboxylic acid

Benefits of breaking up the big power companies : What are the benefits of breaking up the big power companies like Facebook, Amazon, Google, etc? What are ways to increase competition without breaking up Amazo

How some of concepts have shaped society : Demonstrate how some of these concepts have shaped or influenced our society using at least 3 tales to support your answer.

Calculate the elasticity of supply for males and females : For EACH of the elasticities, explain whether the income effect or the substitution effect is stronger to explain the answers you have obtained in part a.

Compute the project cash flows in years : Compute the project's cash flows in years 0-4, calculate the net present worth of the project and its internal rate of return

Medical organization effort to implement quality improvement : Discuss an experience with a medical organization's effort to implement quality improvement.

Create an enforceable contract in any department of a health : Create an enforceable contract in any department of a health care organization. How can a contract be legally valid? When is a contract voidable?

What is the realized gross loss to be recognized by entity : What is the realized gross loss to be recognized by the entity for the year ended December 31, 2021 under percentage of completion method

Explain why disney implemented strategic pricing : How does the concept of elasticity explain why Disney implemented strategic pricing, and what the results were?

User Account

All Pages