C 4. CPC Corporation is an international plumbing equipment and supply company l
ID: 2426145 • Letter: C
Question
C 4. CPC Corporation is an international plumbing equipment and supply company located in southern California. The manager of the Pipe Division is considering the purchase of a computerized copper pipe machine that costs $120,000. The machine has a six-year life, and its expected residual value after six years of use will be 10 percent of its original cost. Cash revenue generated by the new machine is projected to be $50,000 in year 1 and will increase by $10,000 each year for the next five years. Variable cash operating costs will be materials and parts, 25 percent of revenue; machine labor, 5 percent of revenue; and overhead, 15 percent of revenue. First-year sales and marketing cash outflows are expected to be $10,500 and will decrease by 10 percent each year over the life of the new machine. Anticipated cash administrative expenses will be $2,500 per year. The company uses a 15 percent minimum rate of return for all capital investment analyses. 1.Prepare an Excel spreadsheet to compute the net present value of the anticipated cash flows for the life of the proposed new machine. Use the following format: Should the company invest in the new machine? 2. After careful analysis, the controller has determined that the variable rate for materials and parts can be reduced to 22 percent of revenue. Will this reduction in cash outflow change the decision about investing in the new machine? Explain your answer. 3. The marketing manager has determined that the initial estimate of sales and marketing cash expenses was too high and has reduced that estimate by $1,000. The 10 percent annual reductions are still expected to occur. Together with the change in 2, will this reduction affect the initial investment decision? Explain your answer.
Explanation / Answer
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
Initial Investment
(120,000)
Salvage value
12,000
Cash revenue
50,000
60,000
70,000
80,000
90,000
100,000
Variable Cost
(12,500)
(15,000)
(17,500)
(20,000)
(22,500)
(25,000)
Machine Labor
(2,500)
(3,000)
(3,500)
(4,000)
(4,500)
(5,000)
Overhead
(7,500)
(9,000)
(10,500)
(12,000)
(13,500)
(15,000)
Sales and marketing cash outflows
(10,500)
(9,450)
(8,505)
(7,655)
(6,889)
(6,200)
Administrative expenses
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
PV Factor @ 15%
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
Present Value
(120,000)
14,500
21,050
27,495
33,846
40,111
58,300
Net Present Value
(120,000)
12,609
15,917
18,078
19,351
19,942
25,205
(8,898)
1.As net present value is negative not advisable to invest
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
Initial Investment
(120,000)
Salvage value
12,000
Cash revenue
50,000
60,000
70,000
80,000
90,000
100,000
Variable Cost
(11,000)
(13,200)
(15,400)
(17,600)
(19,800)
(22,000)
Machine Labor
(2,500)
(3,000)
(3,500)
(4,000)
(4,500)
(5,000)
Overhead
(7,500)
(9,000)
(10,500)
(12,000)
(13,500)
(15,000)
Sales and marketing cash outflows
(10,500)
(9,450)
(8,505)
(7,655)
(6,889)
(6,200)
Administrative expenses
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
PV Factor @ 15%
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
Present Value
(120,000)
16,000
22,850
29,595
36,246
42,811
61,300
Net Present Value
(120,000)
13,913
17,278
19,459
20,723
21,285
26,502
(840)
2. NPV is still negative hence not advisable to invest
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
Initial Investment
(120,000)
Salvage value
12,000
Cash revenue
50,000
60,000
70,000
80,000
90,000
100,000
Variable Cost
(11,000)
(13,200)
(15,400)
(17,600)
(19,800)
(22,000)
Machine Labor
(2,500)
(3,000)
(3,500)
(4,000)
(4,500)
(5,000)
Overhead
(7,500)
(9,000)
(10,500)
(12,000)
(13,500)
(15,000)
Sales and marketing cash outflows
(9,500)
(8,550)
(7,695)
(6,926)
(6,233)
(5,610)
Administrative expenses
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
PV Factor @ 15%
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
Present Value
(120,000)
17,000
23,750
30,405
36,975
43,467
61,890
Net Present Value
(120,000)
14,783
17,958
19,992
21,140
21,611
26,757
2,241
3.yes ,because npv is positive we can take up the project
Particulars
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
Initial Investment
(120,000)
Salvage value
12,000
Cash revenue
50,000
60,000
70,000
80,000
90,000
100,000
Variable Cost
(12,500)
(15,000)
(17,500)
(20,000)
(22,500)
(25,000)
Machine Labor
(2,500)
(3,000)
(3,500)
(4,000)
(4,500)
(5,000)
Overhead
(7,500)
(9,000)
(10,500)
(12,000)
(13,500)
(15,000)
Sales and marketing cash outflows
(10,500)
(9,450)
(8,505)
(7,655)
(6,889)
(6,200)
Administrative expenses
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
(2,500)
PV Factor @ 15%
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
Present Value
(120,000)
14,500
21,050
27,495
33,846
40,111
58,300
Net Present Value
(120,000)
12,609
15,917
18,078
19,351
19,942
25,205
(8,898)
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