North Bay Village Safety Products has an opportunity to manufacture replacement
ID: 2455956 • Letter: N
Question
North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:
YR
Sales
Retooling expense
1
300,000
2
650,000
3
2,000,000
100,000
4
2,100,000
50,000
5
2,300,000
50,000
6
2,200,000
50,000
7
2,150,000
50,000
8
2,025,000
10,000
9
2,000,000
10,000
10
400,000
16,125,000
Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.
REQUIRED:
4.1. What is the Net Present Value of this project?
4.2. Should North Bay accept this project and make the investment? Why or why not?
4.3. What is the Internal Rate of Return of this project?
4.4. North Bay is considering ending the project after nine years. What is the
Net Present Value of the project with a nine year duration instead of ten years?
4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to
nine years? Why is it that way?
North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:
YR
Sales
Retooling expense
1
300,000
2
650,000
3
2,000,000
100,000
4
2,100,000
50,000
5
2,300,000
50,000
6
2,200,000
50,000
7
2,150,000
50,000
8
2,025,000
10,000
9
2,000,000
10,000
10
400,000
16,125,000
Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.
REQUIRED:
4.1. What is the Net Present Value of this project?
4.2. Should North Bay accept this project and make the investment? Why or why not?
4.3. What is the Internal Rate of Return of this project?
4.4. North Bay is considering ending the project after nine years. What is the
Net Present Value of the project with a nine year duration instead of ten years?
4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to
nine years? Why is it that way?
North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:
YR
Sales
Retooling expense
1
300,000
2
650,000
3
2,000,000
100,000
4
2,100,000
50,000
5
2,300,000
50,000
6
2,200,000
50,000
7
2,150,000
50,000
8
2,025,000
10,000
9
2,000,000
10,000
10
400,000
16,125,000
Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.
REQUIRED:
4.1. What is the Net Present Value of this project?
4.2. Should North Bay accept this project and make the investment? Why or why not?
4.3. What is the Internal Rate of Return of this project?
4.4. North Bay is considering ending the project after nine years. What is the
Net Present Value of the project with a nine year duration instead of ten years?
4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to
nine years? Why is it that way?
North Bay Village Safety Products has an opportunity to manufacture replacement air bags for Takata Corp on a long-term contract for warranty work. The following financial information is available for this project:
YR
Sales
Retooling expense
1
300,000
2
650,000
3
2,000,000
100,000
4
2,100,000
50,000
5
2,300,000
50,000
6
2,200,000
50,000
7
2,150,000
50,000
8
2,025,000
10,000
9
2,000,000
10,000
10
400,000
16,125,000
Additional information
Equipment will cost $2,575,000 and will have a salvage value of $75,000.
The project will require $100,000 in working capital.
The company depreciates equipment using the straight-line method.
Cost of goods sold will be 25% of sales.
Annual general & admin expense will be $740,000 and includes depreciation expense.
The cost of capital is 16%.
REQUIRED:
4.1. What is the Net Present Value of this project?
4.2. Should North Bay accept this project and make the investment? Why or why not?
4.3. What is the Internal Rate of Return of this project?
4.4. North Bay is considering ending the project after nine years. What is the
Net Present Value of the project with a nine year duration instead of ten years?
4.5. What is the difference in cash flow in years 1 through 8 if the project is cut back to
nine years? Why is it that way?
YR
Sales
Retooling expense
1
300,000
2
650,000
3
2,000,000
100,000
4
2,100,000
50,000
5
2,300,000
50,000
6
2,200,000
50,000
7
2,150,000
50,000
8
2,025,000
10,000
9
2,000,000
10,000
10
400,000
16,125,000
Explanation / Answer
Year Sales Retooling expenses COGS Annual general &admn. Exp Net annual cash flow 1 300000 75000 740000 -515000 2 650000 162500 740000 -252500 3 2000000 100000 500000 740000 660000 4 2100000 50000 525000 740000 785000 5 2300000 50000 575000 740000 935000 6 2200000 50000 550000 740000 860000 7 2150000 50000 537500 740000 822500 8 2025000 10000 506250 740000 768750 9 2000000 10000 500000 740000 750000 10 400000 100000 740000 -440000 Year 0 cash flows Cost of equipment 2575000 Working capital reqd. 100000 Total outflow 2675000 Year Outflow/Inflow PV F @ 16% PV @ 16% 0 -2675000 1 -2675000 1 -515000 0.86207 -443966 2 -252500 0.74316 -187648 3 660000 0.64066 422835.6 4 785000 0.55229 433547.7 5 935000 0.47611 445162.9 6 860000 0.41044 352978.4 7 822500 0.35383 291025.2 8 768750 0.30503 234491.8 9 750000 0.26295 197212.5 10 -440000 0.22668 -99739.2 W/C released10 100000 0.22668 22668 NET PRESENT value -1006431 NET PRESENT value -1006431 As NPV is -ve. Project cannot be accepted. Year Outflow/Inflow 0 -2675000 1 -515000 2 -252500 3 660000 4 785000 5 935000 6 860000 7 822500 8 768750 9 750000 10 -340000 IRR 8.145% Project cut to 9 years Year Outflow/Inflow Addl.depn. NetOutflow/Inflow PV F @ 16% PV @ 16% 0 -2675000 -2675000 1 -2675000 1 -515000 27778 -542778 0.86207 -467913 2 -252500 27778 -280278 0.74316 -208291 3 660000 27778 632222 0.64066 405039.3 4 785000 27778 757222 0.55229 418206.1 5 935000 27778 907222 0.47611 431937.5 6 860000 27778 832222 0.41044 341577.2 7 822500 27778 794722 0.35383 281196.5 8 768750 27778 740972 0.30503 226018.7 9 850000 27778 822222 0.26295 216203.3 NPV -1031025 cash flow 1--8 yrs. 10 year project 1548427 cash flow 1--8 yrs. 9 year project 1427771 Difference 120656 Because of depreciation 27778*4.34359 120656 (2575000-75000)/9= 277778-250000=27778 (2575000-75000)/10= 250000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.