Question

- has an opportunity to accept a special order t p hat will result in immediate profit of $69,000. The marketing epts the order, the company will lose regular customers. Specifically, she believes the effect will be lost profits of $9,500 in each of the next 4 years Assuming a discount rate of 5%, what is the net present value of 10. AO $11,571 BO $14,464 СО $18,080 DO s22.600 accepting the special order? EO$28,250 8 pt X company estimates sales of 8,400 units in each of the next 4 years, with a contribution margin of $5.80 per unit. Additional hed costs will be $16,436. Equipment coeting $120,000 will have to be purchased; the equipment will bave no salvage value Company is considering launching a new product. After conducting a market research study that cost $5,000, the at the end of 4 years. What is the internal rate of return of launching the new product? 11. AO 003 BO 0.0 CO 0.0 DO 0.06 EO 0.07 FO 0.08 Present Value of $1.00 Period | 3% .971 943 0.962 0.952 0.943 0.935 0.9260.917 0.842 901 0.812 731 659 909 0.873 0.816 0.792 0.7630.735 857 794 0.797 0.712 0.636 0.907 0.915 0.889 0.864 0. .823 0.82 0.747 0.713 0.681 0.650 0.621 0.596 G 10.564 0.535 | 0.507 .837 81 0.513 0677 0.627 052 0.540 0.502 Present Value of an Annuity of $1.00 0.467 0.434 0.404 0.731 12% -14% 0.962 Period T-3% | 0.952-T 0943-TO 935-1-0.926 - 10.9 0.917 0.90 0.901 0.893 1.783 1.759 2.531 T13 2.444 1.736 21.913 1.886 1.8591.833 1.808 2.577 .993 5.076 --i-4 917- -i-4.767ーー!ー4.623 487 3.170 791 4355- 2.775 3.465 | 3.357 | 3.312 |3.240 .890 3.037 3.605 3.546 1.212 .100 4.580 14 111 4.564 4.486 4.231 02 5.786 5.582 5.389 5.200 5.033 888 6.733 6.463 62106.971 5.747 5.5355.335 5.146 4.968

Answer 1

Solution 10:

Net present value of accepting the special order = Immediate profit from special order - Present value of lost profit on regular sales

= $69,000 - ($9,500 * Cumulative PV Factor at 5% for 4 periods)

= $69,000 - $9,500 * 3.546

= $35,313

Hence option F is correct.

Solution 11:

Initial investment = $120,000

Annual cash inflows = Contribution margin - Fixed costs = (8400*$5.80) - $16,436 = $32,284

At IRR, present value of cash inflows is equal to initial investment

$32,284 * Cumulative PV Factor at IRR for 4 periods = $120,000

Cumulative PV Factor at IRR for 4 periods = $120,000 / $32,284 = 3.717

Refer PV table, this factor falls at IRR = 3%

Hence option A is correct.