Tremonton Toys Final Exam Capital Budgeting Question

Tremonton Toys Final Exam Capital Budgeting Question - The...

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Tremonton Toys Capital Budgeting Question Tremonton Toys is an American company that produces unique, educational toys for  children from ages one to fourteen.  Based on the results of a $78,850 market study,  Tremonton Toys is considering expanding their production into Europe and increasing  revenues by an estimated $1,125,000 per year.  The engineering designs for the new  machine required for this project have just been completed at a cost of $58,000 and will  be used as a guideline to the installation if the project is approved.  To sell the additional  $1,125,000 of their unique educational toys, Tremonton Toys will incur two new costs.  First, Tremonton Toys will need to replace the old machine.  Second, Tremonton Toys  will need to hire some part-time design consultants and spend more money on raw  materials and labor.  These additional expenses will be $398,000 per year.
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Unformatted text preview: The old machine has a $105,000 market value if sold today, a $30,000 book value, and is being depreciated straight line to a zero book value over the next three years. If Tremonton Toys doesnt expand into Europe, their old machine will do an adequate job for 5 more years and then could be sold for $17,500. The new, higher-capacity machine will cost $1,013,500. Additionally, Tremonton Toys will pay a sales tax of 8.5% and delivery and installation fee of $66,500. The new machine will be depreciated on a straight-line basis over 5 years to its estimated salvage value of $80,000. If sales increase, Tremonton Toys will need to invest $88,000 in working capital which will be fully recovered at the end of the 5 year project. Tremonton Toys has a 17% cost of capital and a corporate tax rate of 34%....
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