QUESTION ONE
Printers Inc., is considering investing in a new plant to manufacturer a new generation of printers developed by 5he firm's research and development (R&D) department.
1. Projects useful life: The company expects the plant to operate for five years
2. Capital expenditure: $6million, which includes the construction costs and the costs of machinery and installation. The plant will be built on a parking lot owned by the company
3. Depreciation: For tax purposes ,the building and equipment will be depreciated over ten years using straight -line method
4. Revenue: The Company expects to sell 5,000 printers in year one, 10,000 in year two, and 20,000 thereafter. The printers will be sold at $800 each
5. R&D costs: $1million spent a year ago and this year
6. Overhead costs: 3.75 percent of the project revenues ,as stipulated by the corporate manual
7. Operating costs: Direct and indirect costs are expected to be $500 per unit produced
8. Inventories :The initial investment in raw, working in progress, and finished goods inventories is estimated at $1,500,000
9. Financing cost:10 percent of capital expenditures per year ,as stipulated by the corporate manual
10. Tax rate : 40 percent (includes federal and state taxes)
11. Discount rate: 8 percent .This is printers Inc.'s current borrowing rate.
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NOW
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YEAR 1
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YEAR 2
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YEAR 3
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YEAR 4
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YEAR 5
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- Capital expenditure
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-$6,000
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- Inventories
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-1,500
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- R&D expenses
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-1,000
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- Revenue
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- Overhead costs
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- Operating costs
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- Depreciation
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- EBIT
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- EAT
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- Add depreciation
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- Net cash flow
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-$8,500,
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- Discount rate
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8%
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Required
1. Compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet.
a) 5-year projected income statement
b) 5-year projected cash flow
Calculate
c) The Payback period
d) Discounted Payback
e) The Profitability Index
f) The Net Present Value
g) The Internal Rate of Return