FLW Inc. is preparing to expand its line of Arts and Crafts style of executive o
ID: 2717069 • Letter: F
Question
FLW Inc. is preparing to expand its line of Arts and Crafts style of executive office furniture. The company must buy new milling equipment for this expansion. The equipment cost is $200,000. The equipment is depreciated to a zero salvage value using the straight-line method. The expected salvage value at the end of the project is $32,000. FLW will have to increase its inventory of black cherry and red oak lumber. The increase will cost $25,000. The firm expects sales to be $201,000 per year and variable costs are 35 percent of sales. Fixed costs are $45,000 per year. The tax rate is 40 percent and the cost of capital is 10 percent. What is the Payback Period? What is the Profitability Index? What is the Internal Rate of Return? What is the Net Present Value? The Payback crieteria is 2.5 years. Is this project acceptable using this model? Is this project acceptable using the PI model? Is this project acceptable using the IRR model? Is this project acceptable using the NPV model? Should FLW accept this project (yes or no)?Explanation / Answer
Important note- In this question at one place 10% cost of capital mentioned but in the last part its mentioned as 12%. This question is solved using 12% cost of capital
Payback period= Investment required for the project/net annual cash inflow
where R is the interest rate and T is the number of time periods. IRR is calculated using the NPV formula by solving for R if the NPV equals zero.
Profitability Index Ratio=0.31 (62173/200000)
IRR
IRR IS THE RATE OF RETURN WHERE NPV IS ZERO
Calculation of net annual cash inflow Particulars Amount in $ Sales 201000 Less- Increase in inventory( assumed its not included in fixed and variable cost) 25000 Variable cost 70350 Fixed cost 45000 Ner operating income 60650 Less- taxes 24260 Net annual cash inflow after tax 36390Related Questions
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