Basis of npv and irr, Financial Accounting

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated from the School of Administrative Studies at York University and works for Oxford as an analyst. On Thursday, his manager asked him to evaluate the two new product lines and needs the recommendation by next Monday. Necessary equipment for the production line AME will cost $10 million, including installation costs. Product line AME will also require an initial investment of $3million in net working capital. Product line AME will generate pre-tax revenues that are $5.6 million for the first year. Then the pre-tax revenue will grow at an annual rate of 2 percent for the next 14 years. A new technology will replace the product AME after that. The pre-tax operating costs will be $2.2 million/year for the first 10 years, then $3.3 million/year for the next 5 years. The salvage value of AME will be $0.39 million at the end of year 15.

New equipment and installation costs for product line CGK will be $ 7 million and the initial working capital requirement will also be $3million. Production line CGK will generate pre-tax revenues that are $4.8 million for the first year. Then the pre-tax revenue will then increase at an annual rate of 3 percent for the next 14 years. A new model is in R&D process and will replace the CGK after that. The pre-tax operating costs will be $2.5 million/year for the first year and then grow at an annual rate of 2 percent for the next 14 years. The salvage value of CGK will be $0.27 million at the end of year 15.

The initial equipment purchase falls into a CCA Asset Class 8 at a rate of 20 percent, regardless of which alternative is chosen. Oxford's corporate tax rate is 40 percent and its rate of required return on such investments is 12 percent. Assume the initial working capital investment will be made at the time of the purchase the equipment for either product line. For simplicity, all cash flows for a given year occur at the end of the year.

If you were Eric, which new product line would you recommend on the basis of NPV and IRR?

Posted Date: 2/20/2013 4:58:57 AM | Location : United States







Related Discussions:- Basis of npv and irr, Assignment Help, Ask Question on Basis of npv and irr, Get Answer, Expert's Help, Basis of npv and irr Discussions

Write discussion on Basis of npv and irr
Your posts are moderated
Related Questions
I have a presentation on an article (around 20 pages). I also need 2 current real life examples (2 companies) to support the presentation. Can you do that? How long it will take yo

I am working on a bank reconciliation problem. How should I record the following transaction on the company's cash record? (10/31/13 Bank Rec) A two month, 8%, $1350 customer's not

1.      Allocation of Indirect Cost Radiology Department in long Island Jewish Hospital incurred $1,267,000 of total indirect cost in five procedures (CC#557: Diagnostic Rad

Construct the Market Value Balance Sheet XYZ, Inc., another company founded by Larry Davidson in 2005, is currently entirely equity financed. That means the company carries no

Protected transactions These fall into three categories: (A) Under Section 50: Payments by the bankrupt to creditors; Payments or deliveries to the bankrupt; C

Determine the Balancing risk and return All decision making involves future and business decision making is no exception. Only thing certain about the future, though, is that w

Public Oversight Board (POB) - POB is an independent oversight board, composed of public members that monitors and evaluates peer reviews conducted by SEC Practice Section (SECPS)

Problem 1 (28 marks) Pre-Contribution Balance Sheets and Fair Values June 30, 20X9 (in thousands of $) Swag Co. Perk Ltd. Pre- Contribution Fair Value Pre- Contributi

Investment with cum.div. Quotation Investment with cum.div. Quotation will be debited to the investment account at its full value. When the dividend is subsequently received it

Joe seeks your assistance in assessing these investment options. He has five particular concerns, as outlined below. 1. Regarding his photographic studio, which would be a bette