Explore BrainMass

Explore BrainMass

    Making Capital Investment Decisions: Korry Materials

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Can you help me get started with this assignment?

    You must analyze a potential new product -- a caulking compound that Korry Materials' R&D people developed for use in the residential construction industry. Korry's marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $125,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable costs would be 60% of sales revenue, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3 year life. When production ceases after 3 years, the equipment should have a market value of $15,000. Korry's tax rate is 40%, and it uses a 10% WACC for average risk projects.

    The R&D costs for the new product were $30,000, and those costs were incurred and expensed for tax purposes last year. If Korry Materials accepts the new project it will result in an annual loss of revenue on an existing product of $5,000.

    Find the required year 0 investment, the annual after-tax operating cash flow, and the terminal year cash flow. Assuming the project is of average risk, calculate the project's NPV, IRR, MIRR, and payback period.

    © BrainMass Inc. brainmass.com June 4, 2020, 12:10 am ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/making-capital-investment-decisions-korry-materials-323244

    Solution Preview

    Equipment $125,000+$25,000 = $150,000
    Net working capital $35,000-$15,000 = $20,000
    Required Year 0 investment = $150,000+$20,000 = $170,000

    MACRS Depreciation
    Year 1 = $150,000 x 33.33% = $49,995
    Year 2 = $150,000 x 44.45% = $66,675
    Year 3 = $150,000 x 14.81% = $22,215
    Year 4 = $150,000 x 7.41% = $11,115

    Revenues 115,000 x $3.25 =$373,750
    Annual loss of revenue on existing products -$5,000
    Variable costs $373,750 x 60% = $224,250
    Fixed costs $70,000
    Depreciation costs $49,995
    Operating income before tax $373,750-$5,000-$224,250-$70,000-$49,995 = $24,505
    Income tax $24,595 x 40% = $9,802
    Operating profit $24,505-$9,802 = $14,703
    Year 1 Annual after-tax operating cash flow = $14,703+$49,995 = $64,698

    Revenues 115,000 x $3.25 ...

    Solution Summary

    This solution assists with decisions regarding capital investments for Korry Materials.

    $2.19

    ADVERTISEMENT