Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for
rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the machine is 4 years, and it falls under the MACRS three year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value.
Bart and Millhouse anticipate recouping 100% of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in year 1 and 2 and by $10,000 each year in year 3 and 4. The increase in operating expenses is estimated to be 20% of the annual change in sales. Assume that the marginal tax rate is 40%.
Assume that the company’s discount rate is 14%. Calculate the NPV of this project. Would you recommend that Bart and Millhouse add this machine to their factory?
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Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds...
2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. With this purchase, current assets must...
Hi,
In this question, "current assets must increase by $5,000 and
current liabilities will increase by $3,000.", but why $5,000 is
shown as negative in the expert answer?
Thank you very much in advance!
2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for rubber snakes. To take advantage of this...