Capital budgeting concepts # 2

Individual Project

 

Capital Budgeting Concepts

 

Wed, 6/21/17

 

Numeric

 

200

 

 

A spreadsheet file and a 700–1,000-word report that addresses the qualitative questions

 

A company is considering making a new bicycle. The company expects to sell 4,000 units of the bicycle each year for 5 years. Each bicycle is expected to sell for $400. The company’s tax rate is 30%. Fixed costs are $700,000 per year, and variable costs are $75 per bicycle.

 

To make the bicycle, the company will purchase a machine that costs $1.5 million today. The machine will be depreciated with straight-line depreciation over a 5-year period. The machine will be sold for $50,000 when this project ends in 5 years.

 

The net working capital requirements are $150,000 at Year 0, which are expected to be recovered in full in Year 5. The required rate of return for the project is 12%.

 

Complete the following with this information:

 

  • Estimate the project’s cash flows
  • Estimate the project’s net present value (NPV)
  • Determine if the project should be accepted or not

 

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