Roten Manufacturing Company is considering an investment on a machine for produc

Question

Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1 - 8.

Should Roten include consulting fee, $7,000, in estimating project's cash flows?

Yes

No

1 points   

QUESTION 2

What is the project cash flow at Year 0?

-$15,000

-$203,000

-$250,000

-$265,000

1 points   

QUESTION 3

What is the project cash flow at Year 5?

$83,200

$50,500

$74,000

$68,200

2 points   

QUESTION 4

What is payback period for the project?

4.51 years

3.89 years

4.02 years

3.78 years

1 points   

QUESTION 5

What is NPV for the project?

$1,653.45

-$6,468.34

$2,845.48

-$31,469.12

2 points   

QUESTION 6

What is IRR for the project?

10.41%

8.52%

9.04%

11.73%

1 points   

QUESTION 7

What is PI for the project?

1.89

0.98

0.94

1.01

1 points   

QUESTION 8

Should Roten accept the project?

Yes

No

Yes

No

Explanation / Answer

Questions 1: b. No , Roten should not include consulting fee, $7,000, in estimating project's cash flows, because this expense is like a sunk cost, which is not related for considering in capital budgeting

Questions 2: d -$265000 , Year0 = cost of machine + net working capital

   =$250,000 + $15,000

= $265000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.