Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 10, Problem 10.29P
ETHICS PROBLEM Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent lights in all of its stores with LED lights. The main advantage of making this switch is that the LED lights are much more efficient and will cost less to operate. In addition, the LED lights last much longer and will have to be replaced after 10 years, whereas the existing lights have to be replaced after 5 years. Of course, making this change will require a large investment to purchase new LED lights and to pay for the labor of switching out tens of thousands of bulbs. Diane plans to use a 10-year horizon to analyze this proposal, figuring that changes to lighting technology will eventually make this investment obsolete.
Diane’s friend and coworker, David, has analyzed another energy-saving investment opportunity that involves replacing outdoor lighting with solar-powered fixtures in a few of the company’s stores. David also used a 10-year horizon to conduct his analysis. Cash flow
| Year | LED project | Solar project |
| 0 | –$4,200,000 | –$500,000 |
| 1 | 700,000 | 60,000 |
| 2 | 700,000 | 60,000 |
| 3 | 700,000 | 60,000 |
| 4 | 700,000 | 60,000 |
| 5 | 1,000,000 | 60,000 |
| 6 | 700,000 | 60,000 |
| 7 | 700,000 | 60,000 |
| 8 | 700,000 | 60,000 |
| 9 | 700,000 | 60,000 |
| 10 | 700,000 | 60,000 |
- a. What is the
NPV of each investment? Which investment (if either) should the company undertake? - b. David approaches Diane for a favor. David says that the solar lighting project is a pet project of his boss, and David really wants to get the project approved to curry favor with his boss. He suggests to Diane that they roll their two projects into a single proposal. The cash flows for this combined project would simply equal the sum of the two individual projects. Calculate the NPV of the combined project. Does it appear to be worth doing? Would you recommend investing in the combined project?
- c. What is the ethical issue that Diane faces? Is any harm done if she does the favor for David as he asks?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
I know this is a lot of information but this is what I would need to solve the problem. Any help would be appreciated!
Your company, VR Co., has been approached to bid on a contract to sell 20,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $80,000 initially and to be returned at the end of the project, and the equipment can be sold for $200,000 at the end of production. Fixed costs are $700,000 per year, and variable costs are $48 per unit. In addition to the contract, you feel your company can sell 4,000, 12,000, 14,000, and 7,000 additional units to companies in other countries over the next four years, respectively, at a price of $145. This price is fixed.…
Mad Scientist, Inc. is considering investing into the nanotechnology business. After conducting
a detailed due diligence process, the company's board decided that the current cost of entry
into the nanotechnology business is too high. The board also thinks that the commercialization
of technological advancements will eventually drive costs down and the company should get
into the nanotech business one or two years from now, when they can realize a higher NPV on
their investment. Given the above, the board has chosen the option to:
Expand
Abandon
Delay
× Your answer is incorrect.
A university's college of engineering would like to determine how much it will cost to keep its computing equipment current. In today's
dollars, the college estimates that it will cost $190,000 to replace old computing equipment. Due to decreasing prices on computers, it
estimates that this cost will decrease each of the following years by 7%. What would the present worth of computing updates for years
1-5 be, assuming a required 15% real return on its investments?
Click here to access the TVM Factor Table calculator.
A
Carry all interim calculations to 5 decimal places and then round your final answer to a whole number. The tolerance is + $10.
564921.75
Chapter 10 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQCh. 10.3 - Prob. 10.6RQCh. 10.4 - Prob. 10.8RQCh. 10.4 - Prob. 10.9RQCh. 10.4 - Prob. 10.10RQCh. 10.5 - How is a net present value profile used to compare...
Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- If can't do all with explanation please skip iwill definitely like if you follow this or skip pls You are considering purchasing a new database system for your company. The system will cost $80,000, and it will cost another $15,000 for equipment and training. The system is expected to be sold after three years, when you plan to outsource database activities. You hope that you can sell your system to a competitor for $12,000. You expect to save $22,000 per year in operating costs. Your corporate cost of capital is 10%. What is the project’s net investment outlay at Year 0? What are the projects’ operating cash flows in Years 1, 2, and 3? What is the terminal cash flow at the end of Year 3? If the project has average risk, is it expected to be profitable? On what basis did you draw this conclusion? .arrow_forwardYour highly successful software company is considering adding a new software title to your list. If you add the new product, it will use the full capacity of your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had previously planned on using the unused capacity to start selling “BB” on the West Coast in two years. Eventually, you would have had to purchase additional duplicating machines 10 years from today, but since your new product will use up the extra capacity, this will require moving this purchase up to 2 years from today. If the new machines will cost $100,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 12 percent, what is the opportunity cost associated with using the unused capacity for the new product? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.arrow_forwardour highly successful software company is considering adding a new software title to your list. If you add the new product, it will use the full capacity of your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had previously planned on using the unused capacity to start selling “BB” on the West Coast in two years. Eventually, you would have had to purchase additional duplicating machines 10 years from today, but since your new product will use up the extra capacity, this will require moving this purchase up to 2 years from today. If the new machines will cost $101,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 10 percent, what is the opportunity cost associated with using the unused capacity for the new product? Do not round intermediate calculations. Round your answer to 2 decimal placesarrow_forward
- You are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had planned on using the unused capacity to start selling “BB” on the West coast in two years. You would eventually have had to purchase additional duplicating machines 10 years from today, but using the capacity for your new product will require moving this purchase up to 2 years from today. If the new machines will cost $113,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 14 percent, what is the opportunity cost associated with using the unused capacity for the new product? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardYou are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had planned on using the unused capacity to start selling “BB” on the west coast in two years. You would eventually have had to purchase additional duplicating machines 10 years from today, but using the capacity for your new product will require moving this purchase up to two years from today. If the new machines will cost $101,000 and can be expensed under section 179, your marginal tax rate is 21 percent, and your cost of capital is 10 percent, what is the opportunity cost associated with using the unused capacity for the new product?arrow_forward4. What is a Break-even Point and why do managers calculate it? 5. Branton Electric is considering the purchase of an entire cargo container filled with upgraded utility meters for $20,000. Branton can charge $50 for the installation of each upgraded meter, while the actual cost of the installation would be only $15. How many utility meter upgrades are necessary for Branton Electric to break even on this purchase? (Quick Start #16) 6. What are the advantages and disadvantages of using a conservative strategy of Capacity versus an Aggressive strategy?arrow_forward
- Shonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?arrow_forwardA refinisher of antiques named Constance has been so successful with her small business that she is planning to expand her shop. She is going to start enlarging her shop by purchasing the following equipment.(a) What would be the net cost to Constance to obtain this equipment? Assume that she can trade the old equipment in for 15% of its original cost. Assume there has been no inflation in equipment prices. (b) Suggest a green engineering approach to constance for disposing of the solvents and lacquers used in her business.arrow_forwardGarmin is thinking of launching a new running watch the allows you to download a Spotify playlist. If launched, sales of a similar Garmin watch witout the music feature is expected to decrease by $100,000 a year. Which of the following is true? This is an externality and should be included This is an externality and should not be included This is an opportunity cost and should be included This is an opportunity cost and should not be included This is an sunk cost and should be included This is an sunk cost and should not be includedarrow_forward
- Darren Mack owns the Gas n’ Go convenience store and gas station. After hearing a marketing lecture, he realizes that it might be possible to draw more customers to his high-margin convenience store by selling his gas at a lower price. However, the Gas n’ Go is unable to qualify for volume discounts on its gas purchases, and therefore, cannot sell gas for profit if the price is lowered. Each new pump will cost $95,000 to install but will increase customer traffic in the store by 12,000 customers per year. Also, because the Gas n’ Go would be selling its gasoline at no profit, Darren plans on increasing the profit margin on convenience store items incrementally over the next 5 years. Assume a discount rate of 7%. The projected convenience store sales per customer and the projected profit margin for the next 5 years are as follows: Year Projected Convenience Store Sales Per Customer Projected Profit Margin 1 $5.00 20% 2 $6.50 25% 3 $8.00 30% 4…arrow_forwardYou are the manager of a pharmaceutical company and are considering what type of laptop computers to buy for your salespeople to take with them on their calls. ¨• You can buy fairly inexpensive (and less powerful) older machines for about $2,000 each. These machines will be obsolete in three years and are expected to have an annual maintenance cost of $150. ¨• You can buy newer and more powerful laptops for about $4,000 each. These machines will last five years and are expected to have an annual maintenance cost of $50. ¨If your cost of capital is 12%, which option would you pick and why?arrow_forwardScarlett is considering the purchase of a new Wolf gas range by Sub-Zero Group, Inc. to increase the quality of the food served in her restaurant. It will also enhance the cooking experience for her and her chefs, as they won't have to fuss with the finicky electric burners they currently use. However, the new range is expensive. It will cost $9,920 to buy and properly install. On the upside, it should last for at least 7 years, at which time Scarlett may consider trading it in for another new range. While her operating costs will not decrease as a result of this purchase, Scarlett will be able to generate additional gross margin of at least $1,510 in the first year. After that, she expects the additional gross margin to grow by 10% each year for the next 4 years, at which point it will become stable for the remainder of the 7- year life. She believes the new range will be worth $1,010 at the end of this 7-year period. Her current range can be salvaged today for $250. Click here to…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Fixed Asset Replacement Decision 1235; Author: Accounting Instruction, Help, & How To;https://www.youtube.com/watch?v=LJRzn9K8Nwk;License: Standard Youtube License