Reference no: EM132991458
Question - Christian Co. makes and sells winter boots. They have hired you to evaluate information gathered regarding two potential long-term investments. They have provided you with information gathered about each option below. Evaluate the information, determine what is relevant, then use excel to calculate an NPV for each option. Based on the information and calculation, determine which of the investments Christian should pursue. Christian's tax rate is 30%. A consultant was hired to gather information about both options. She was paid $50,000 and spent 60% of her time on option 2 and 40% on option 1.
Option #1: Purchase a new machine which can increase capacity for making existing winter boots to fill unmet demand. CCA for this machine is expected to be 25%
By purchasing this machine Christian expects they can make and sell an additional 24,500 pairs of boots per year. The boots have historically been very popular and Christian believes this demand will continue to increase for at least four more years. After the four years, it is expected this machine will be sold or traded in for a newer machine that will offer new technologies for boot manufacturing. Additional information can be found below:
1. The sell price of boots is $202 with variable cost at 80% of revenue.
2. Maintenance on the machine is expected to be $8,000 per year in the first two years and $15,000 per year in the remaining years.
3. The initial purchase of the machine is expected to be $3,000,000 and it will depreciate using straight-line over four years. The salvage of the machine after four years is expected to be $200,000.
4. Working capital required is expected to be $25,000 all recovered by the end of four years.
5. The discount rate deemed appropriate to review this project is 8%.
6. Promotion expenses are expected to increase by $10,000 per year in years one and two and then go down to $7,000 per year after that to ensure the demand for the boots will be strong.
Perform a sensitivity analysis for option 1 using the selling price of the new boots. To what extent can the sell price change before it would change your answer to part 2?