Med Drive Inc. manufactures a line of traditional light-weight adjustable colla Show more New Project Problem Med Drive Inc. manufactures a line of traditional light-weight adjustable collapsing wheel chairs for medical transport. Management is considering a business proposal to produce a new line of hydraulic reclining wheel chairs. The proposal has been studied carefully and the following information is forecast: Cost of new production equipment and machinery including freight and setup (Assume 5 year straight line depreciation to 0) $220000 Expense of hiring and training new employees . . . 121500 Pre-start-up advertising and other miscellaneous expenses 25000 Additional selling and administrative expense per year after start-up 115000 Unit sales forecast Year 1 300 Year 2 700 Year 3 1100 Year 4 and beyond 1600 Unit Price 700 Unit cost to manufacture (60% of revenue) 420 Last year anticipating an interest in hydraulic reclining wheelchairs the company bought the rights to a new hydraulic mechanism design for $70000. Med Drive production facilities are currently being utilized to capacity so a new shop has to be acquired for incremental production. The company owns a lot near the present facility on which a new building can be constructed for $195000 (assume 39 year straight line depreciation). The land was purchased 10 years ago for $60700 and now has an estimated market value of 120000. If Med Drive produces hydraulic reclining wheel chairs it expects to lose some of its current sales to the new product. Three percent of the new unit forecast is expected to come out of sales that would have been made in the old line. Prices and direct costs are about the same in the old line as in the new. Med Drives general overhead includes personnel finance and executive functions and runs about 5% of revenue. Small one-time increments in business dont affect overhead spending but a major continuing increase in volume would require additional support. Management estimates that additional spending in overhead areas will amount to about 2% of the new projects revenues. Accounts receivable at year-end are expected to be 1/12 of the average of the current and the next year s sales. Incremental inventories are estimated at $12000 at start-up and for the first year. After that an inventory turnover of 15 times based on cost of sales is expected. Incremental payables are estimated to be 25% of inventories. Med Drives current business is profitable so losses in the new line will result in tax credits. The companys marginal tax rate is 35%. Med Drive Inc. expects to sell the new line at the end of the 6 th year for the price equal to the perpetuity of that years OCF discounted by its cost of capital of 16.8% (proceeds taxed at 35%). Based on this data estimate cash flows for each of the six years the projects IRR and NPV and suggest whether to accept or reject the new business proposal. This is a real life problem and as such does not necessarily have a correct answer. Your logic knowledge of the subject is what matters. Show less
This is a real life problem and as such does not necessarily have a correct answer. Your logic knowledge of the subject is what matters.
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