About production costs associated with the new machine

Assignment Help Financial Management

Reference no: EM131350549

Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, some uncertainty about production costs associated with the new machine. The production department has estimated operating costs at 70% of revenues, but senior management realizes that this figure could turn out to be as low as 65% or as high as 75%. The new machine will be depreciated at a rate of $200,000 per year (straight line, zero salvage). Keener's cost of capital is 13%, and its marginal tax rate is 40%. Assume that Keener Clothiers assigns the following probabilities to production cost as a percent of revenue.

% of Revenue Probability

65% .30

70% .50

75% .20

Compute its expected NPV. Round the answer to two decimal places. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2.

Reference no: EM131350549

Questions Cloud

Leasing company leases an equipment : A professional, leasing company leases an equipment for 5 years contract on monthly payment basis. The lease rate is 15% of the equipment value. And the equipment depreciation rate is 5% . What is the company IRR?

What if you use geometric average growth rate : Suppose Stark Ltd. just issued a dividend of $1.85 per share on its common stock. The company paid dividends of $1.50, $1.59, $1.66, and $1.77 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the c..

The project must earn to equal the aftertax salvage value : Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $9.5 million for the next 8 years. Allied Products uses a discount rate of 14 percent for new product launches. If the estimates of rem..

What will the account balance be after four ?years : If Bob and Judy combine their savings of ?$1,000 and ?$700?, ?respectively, and deposit this amount into an account that pays 2% annual? interest, compounded? monthly, what will the account balance be after 4 ?years?

About production costs associated with the new machine : Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however,..

What was the dollar amount of the accrued interest : Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs one month from today. Of the amount paid for the bond, what ..

Remain the five reported by the average household : Tim and Jill Taylor are retiring this year! Tim has worked for a utility company since his co-op job in college and has participated in all of the company’s retirement savings plans. Jill has worked since their kids were in high school. Are their big..

What is the portfolio expected return : David Brown has $17,705.00 invested in American Cyanamid, $27,260.00 in Gannett Company, and $18,059.00 in Texas International. If American Cyanamid has an expected return of 18.72%, Gannett an expected return of 17.70%, and Texas International an ex..

What is times-interest-earned ratio : The Morris Corporation has $550,000 of debt outstanding, and it pays an interest rate of 9% annually. Morris's annual sales are $2.75 million, its average tax rate is 40%, and its net profit margin on sales is 8%. If the company does not maintain a T..

User Account

All Pages