Sample Final Exam Summer 2009 with Solutions - 1 Capital...

This preview shows page 1 - 2 out of 7 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Accounting
The document you are viewing contains questions related to this textbook.
Chapter 26 / Exercise PR26-4B
Accounting
Reeve/Warren
Expert Verified
1 Capital Budgeting35 Marks2. WACC25 SAME3. Risk and Return15 SAME4. EMH10 5. Risk Management15 Question 1 (35 Marks)Retro Furniture manufactures a variety of home furnishing that replicate styles and colours from the late 1950’s and early 1960’s. The style has been enjoyed a comeback over the past few years (the comeback is correlated with the popularity of the new TV series “Mad Men”). Retro has been very successful with their existing retro products. The results of a $20,000 marketing study indicate significant demand for a new product; brown plaid chesterfields and bowl shaped arm chairs. Retro expects to sell 6,000 units at $2,000 per unit next year. Sales are expected to grow by 5% annually for the next 4 years. In total this is a 5 year project.The Cost of Goods Sold is $1,500 per unit. The supervisors, utilities etc for the plant have been about $300,000 per year and are expected to be constant over this life of the project. They own the building in which all of the current manufacturing is done. There is room in the building to add the new manufacturing equipment. They paid $750,000 for the building. It is on the books for $600,000 and has a current market value of $500,000. CCA rate on buildings is 4% per year declining balance. The new manufacturing equipment will cost a total of $6 million and has a CCA rate of 20% declining balance. It will have no value at the end of the project.Working capital requirements are based on existing practices. Investments in working capital are made a year before sales. Inventory turnover is expected to be 6X. AR is expected to be 2 months worth of sales. AP will start at $1,000,000. All working capital accounts will increase at the same rate as sales. They will borrow $5 million at 8% to finance this project in the first year. The loan is an interest only loan. The tax rate is 40% and the discount rate is 10%.a) (25 marks)i) In table form, indicate the relevant Cash Flows on an annual basis. Calculate the total relevant CF for each year. You may round to the nearest thousand dollars. ii) Calculate the NPV of this project. b) 5 marks Calculate the Profitability Index of this project. How and when is profitability index use in project evaluation?
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Accounting
The document you are viewing contains questions related to this textbook.
Chapter 26 / Exercise PR26-4B
Accounting
Reeve/Warren
Expert Verified

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture