Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be useable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the smoke detector would require a working capital investment of $ 40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Year Sales in Units 1... 7,000 3..... - ..... 4,000 2.... ... 10,000 4 12.. d. The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Amount of Yearly Year Advertising 1-2....... 40,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return and tax rate are both 20%. $70,000 3.... $50,000 4 - 12. S
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be useable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the smoke detector would require a working capital investment of $ 40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Year Sales in Units 1... 7,000 3..... - ..... 4,000 2.... ... 10,000 4 12.. d. The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Amount of Yearly Year Advertising 1-2....... 40,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return and tax rate are both 20%. $70,000 3.... $50,000 4 - 12. S
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...
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Transcribed Image Text:Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector
for homes. To determine whether this would be a profitable venture, the company has gathered
the following data on probable costs and market potential: a. New equipment would have to be
acquired to produce the smoke detector. The equipment would cost $100,000 and be useable for
12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b.
Production and sales of the smoke detector would require a working capital investment of $
40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working
capital would be released for use elsewhere after 12 years. c. An extensive marketing study
projects sales in units over the next 12 years as follows: Year Sales in Units
1...
7,000 3.....
... 10,000 4 -12..
..... 4,000 2....
d. The smoke detectors would sell for $45 each; variable costs for production, administration, and
sales would be $25 per unit. e. To gain entry into the market, the company would have to
advertise heavily in the early years of sales. The advertising program follows: Amount of Yearly
Year Advertising 1-2.......
40,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on
equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.) g.
The company's required rate of return and tax rate are both 20%.
$70,000 3....
$50,000 4 - 12.
S
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