Reference no: EM13986778
Jo Brown’s nursery operation has grown from a small herb plot into a thriving nursery business. There are 10 full-time employees and 20 seasonal (part-time) employees. For the last three years taxable income for Brown’s Nursery has been steady at $350,000 per year.
While Jo is pleased with the current success of the nursery, she is considering a new contract to supply a local grocery chain with fresh herbs year round. The grocery chain’s current supplier is retiring in a year and is planning to sell his business to one of the other grocery chains he also supplies. Rather than assigning a large portion of her current capacity to this contract, she is considering expanding production. Jo has been offered a 5-year contract, starting in 1 year.
To service this new contract without reducing current operations requires purchasing an adjacent piece of land and constructing additional greenhouse space. The property can be purchased for $200,000. The most economical solution to the greenhouse addition is to construct two modular greenhouses for $70,000 each. The modular greenhouses have a useful life of 12 years and a $5000 salvage value. Startup expenses are expected to be $22,500. The purchase of the land, construction of the greenhouses, and startup are projected to require one year. Incremental working capital for this project is $90,000 beginning with startup.
Sales from the contract are forecast at $380,000 each year. Variable costs are estimated at $250,000 the first year, and Jo believes they will decrease at the rate of $5000 per year, as they become expert in growing the new items in the new greenhouses.
Incremental variable overhead for the new space is expected to be $30,000 per year but when the total overhead is re-allocated (based on square feet under glass) the new production will be charged $45,000 per year.
Upon completion of the 5-year contract, Jo believes she can either obtain another contract from this customer, obtain a similar contract from another grocery chain, use the project’s assets to meet increased demand for herbs from current customers of the original operation, or dispose of the project’s assets. She believes the land can be sold for what was paid for it and each greenhouse is expected to have a market value of $40,000 at the end of the 5-year contract. This decision will be made early enough in the fifth year of the contract to dispose of the project’s assets in that year.
The state tax rate is 11%. Jo uses an after-tax MARR of 12%.
How do you use the cost minimization factor come up
: How do you use the cost minimization factor come up with $16 for the price of land for the below question: You run a small farm. You employ workers, you rent land and you rent capital in order to grow the produce. If marginal product per dollar of ca..
|
The evolution of religious and intellectual authority
: The evolution of religious and intellectual authority from the end of the middle ages to modernity Europe’s changing relationships with the rest of the world. The varying and contradictory ways Europeans have conceived of and reconciled freedom and p..
|
When real estate agents sell their own-rather than clients
: When real estate agents sell their own, rather than clients’, houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with better prices (2% higher on average). Why?
|
Applicant pool by dropping this requirement
: Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement?
|
Nursery operation has grown from a small herb plot
: Jo Brown’s nursery operation has grown from a small herb plot into a thriving nursery business. There are 10 full-time employees and 20 seasonal (part-time) employees. For the last three years taxable income for Brown’s Nursery has been steady at $35..
|
Venture capital firms are pools of private capital
: Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies, which usually can’t raise funds through other means. Describe the nature of the incentive conflict between VCs and the managers, identifyi..
|
Conflict was being controlled by these loyalty payments
: Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD. What incentive conflict was bei..
|
Discuss both moral hazard and adverse selection issues
: Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both mor..
|
What is globalization-what made it so controversial
: What is globalization (please define it both as a process and outcome)? What factors can you identify in explaining why globalization occurred? How do you assess its impact upon both rich countries and poor ones, in particular, the issue of inequalit..
|