Calculate the net present worth of the project

Assignment Help Financial Accounting

Reference no: EM132771089

Angola Superheros, Inc. is considering launching a production of a new superhero toy. The production and sales are expected to last 4 years. The project would require a new machine, with a cost of $1,000,000. The machine would be depreciated using the straight-line method over 8 years to zero value after year 8. After 4 years, at the end of the project, the machine is expected to be sold for $30,000. The company estimates that 40,000 toys would be sold annually, at a selling price of $20 per unit. The variable cost of producing each unit is estimated to be $5. In addition, the company will have to pay fixed costs equal to $35,000 each year. The relevant cost of capital is 14%, and the company faces a 25% marginal tax rate.

Problem a. Compute the project's cash flows in years 0-4, calculate the net present worth of the project and its internal rate of return, and determine whether the project should be accepted. Explain your answer.

Problem b. Run a Monte Carlo simulation, varying the variable cost per unit, the annual fixed cost, and the number of units sold. Assume that the variable cost per unit has a mean of $5 and standard deviation of $0.20, that the annual fixed cost has a mean of $35,000 and standard deviation of $2,000, and that the number of units sold annually has a mean of 40,000 and standard deviation of 1,500, and that all three variables follow normal distribution. Compute the present worth of the project for 100 simulation runs. Based on the simulation results, compute the average net present worth and the threshold for the 5% of worst possible outcomes. Comment on the results, the uncertainty of the project's net present worth, and whether the project should be accepted.

Problem c. Use the data table function to construct a table showing the net present worth of the project, while varying the selling price per unit and the cost of capital. Use the following selling prices in your table: 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25. Use the following cost of capital in your table: 9%, 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, and 19%. Comment on the sensitivity of the project's present worth to the cost of capital and the selling price per unit.

Reference no: EM132771089

Questions Cloud

Salient characteristics defining culture in organization : What are some of the salient characteristics defining culture in your organization or group? Provide at least one example.

Describe the development of future leadership : Leadership talent is an organization-wide goal. Discuss how the responsibilities of the development of leadership talent should be partitioned among.

Coco cola company business activities : Research and describe your Coco cola company's business activities

Discuss the potential for def ltd to be classified : ABC Ltd owns 40% of the shares of DEF Ltd; no other party owns more than 3% of the shares. Discuss the potential for DEF Ltd to be classified

Calculate the net present worth of the project : Calculate the net present worth of the project and its internal rate of return, and determine whether the project should be accepted. Explain your answer.

Identify the strengths of the program : Identify the strengths of the program and how they led to goal accomplishment. Describe opportunities for improvement in the talent management planning process.

Effective information management and data governance : Effective information management and data governance are invaluable to an organization.

Evaluate the effectiveness of the communication : Evaluate the effectiveness of the communication of Geico's total rewards program based upon the website's descriptions of the benefits. Recommend two areas.

What would you communicate on the total rewards program : You know from the video that there are at least 4 stakeholder groups to communicate the total rewards program for the organization. One stakeholder group.

User Account

All Pages