Estimate the initial after-tax cash outlay, Cost Accounting

Assignment Help:

Shubenacadie Inc. is currently considering a project with a 5-year life that it believes has the potential to return the company to profitability. Based on the results from a marketing survey that cost the firm $100,000, Shubenacadie is convinced that there is a market for its proposed new product and is now ready to undertake a capital budgeting analysis of the proposed project. The following information has been collected for the purpose of determining the project's net present value (NPV).

The project will require an initial investment of $5 million in new equipment and an investment of $250,000 in additional net working capital that will be released at the conclusion of the project. The cost to install the new equipment is estimated to be $75,000. The equipment is estimated to have a 5-year useful life with an expected salvage value at the end equal to 10% of its original purchase price. For accounting purposes, the new equipment will be depreciated on a straight-line basis. The equipment will be installed in a vacant building that Shubenacadie purchased last year for $1 million. The building, which has no alternative use, has a current market value of $1.25 million and is expected to have a market value of $1.5 million at the end of the project.

It is estimated that the project will generate net revenues before tax of $3 million per year. Finally, Shubenacadie's marginal tax rate is 32% and its weighted average cost of capital is 11%. The applicable CCA rate on the new equipment is 12½%.

Required

a.  Estimate the initial after-tax cash outlay for the proposed project.

b.  Estimate the net present value associated with the proposed project. Ignore CCA tax shields on the building.

c.  Should Shubenacadie Inc. go ahead with this project? Briefly explain.

d. Given that Shubenacadie presently has 5 million common shares outstanding that are trading at $11.50 per share, what will be the new price per share if the firm accepts this project, assuming the markets are efficient?


Related Discussions:- Estimate the initial after-tax cash outlay

Cost, please concept clear me cost accounting for example, we manufacturing...

please concept clear me cost accounting for example, we manufacturing any product

Calculate- total variable cost and average variable cost, The firm currentl...

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other va

Reasons for overhead variances useful for control reasons, Reasons for Over...

Reasons for Overhead Variances Useful for Control Reasons Overhead variances are essentially a book balancing exercising giving an arithmetic reconciliation between the actual

Labour variances, L ABOUR VARIANCES Labour Cost Variance (LCV) De...

L ABOUR VARIANCES Labour Cost Variance (LCV) Described by the ICMA, London, 'Labour cost variance is the variation between the standard direct wages specified for the pro

Estimating, how do you calculate estimating cost for the last of the year b...

how do you calculate estimating cost for the last of the year based on activity during the first half of the year

Capital project, is sale of salvage from capital project recorded as gain/l...

is sale of salvage from capital project recorded as gain/loss or applied back to project costs

What is the profit maximizing level of advertising, Smith Corp. has determi...

Smith Corp. has determined that its contribution margin, (P - MC)/P, is 40%. A recent market research study found the following relationship between adverting outlays and sales rev

Business management, Business Management Business Management includes ...

Business Management Business Management includes planning and staffing, organizing, directing and controlling an organization's activities so like to meet a specified objectiv

What is the margin of safety, Apollo Company manufactures a single product ...

Apollo Company manufactures a single product that sells for $168 per unit and whose total variable costs are $126 per unit. The company's annual fixed costs are $630,000. (1) Use t

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd