Casey nelson is a divisional manager

Question 1. Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:

Cost of new equipment and timbers

$

420,000

Working capital required

$

140,000

Annual net cash receipts

$

155,000

*

Cost to construct new roads in year three

$

48,000

Salvage value of equipment in four years

$

73,000

*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

 The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 19%.

 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

 Required:

a. What is the net present value of the proposed mining project?

b. Should the project be accepted?

Question 2. Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,450,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:

Sales

$

4,300,000

Variable expenses

1,960,000

Contribution margin

2,340,000

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs

$

790,000

Depreciation

890,000

Total fixed expenses

1,680,000

Net operating income

$

660,000

 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

 Required:

1. What is the project’s net present value?

2. What is the project’s internal rate of return to the nearest whole percent?

3. What is the project’s simple rate of return?

4-a. Would the company want Casey to pursue this investment opportunity?

4-b. Would Casey be inclined to pursue this investment opportunity?

Question 3. Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 18%. After careful study, Oakmont estimated the following costs and revenues for the new product:

Cost of equipment needed

$

260,000

Working capital needed

$

87,000

Overhaul of the equipment in year two

$

10,500

Salvage value of the equipment in four years

$

13,500

Annual revenues and costs:

Sales revenues

$

430,000

Variable expenses

$

210,000

Fixed out-of-pocket operating costs

$

88,000

When the project concludes in four years the working capital will be released for investment elsewhere within the company.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

 Required:

Calculate the net present value of this investment opportunity. (Round your final answer to the nearest whole dollar amount.)

Question 4. Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:

a. New equipment would have to be acquired to produce the device. The equipment would cost $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000.

b. Sales in units over the next six years are projected to be as follows:

Year

Sales in Units

1

8,000

2

13,000

3

15,000

4–6

17,000

1. Production and sales of the device would require working capital of $48,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project’s life.

1. The devices would sell for $30 each; variable costs for production, administration, and sales would be $15 per unit.

1. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $132,000 per year. (Depreciation is based on cost less salvage value.)

1. To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

1. The company’s required rate of return is 7%.

1.

Year

Amount of Yearly Advertising

1–2

$

46,000

3

$

57,000

4–6

$

47,000

 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

 Required:

1. Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years.

2-a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.

2-b. Would you recommend that Matheson accept the device as a new product?