• February 10th, 2017

Awesome Gadget, INC is considering making an additional investment of in its production capabilities.

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1
Question 1 Awesome Gadget, INC is considering making an additional investment of in its production capabilities. It has collected data on
the current year’s (year 0) revenue, costs and quantity sold.
The price per unit will be decreased 10% annually (year-1 unit price will be 10% less than the present (year 0) price, etc.)
COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 will be 5% less than the present unit cost,
etc.) costs will increase due to a new salaried technician in all years. No other change is forecast for S.G.& A. Depreciation and
Fixed
working capital for each year areyear proposal income statement (only) for years 1-3 using items from the following data block as
Using this data, prepare a three to be as shown in the data block.
needed. The income statement must be in the standard accounting sequence and contain appropriate subtotals and totals.
Years
0
1
2
3
Unit Price
$199.00
Annual % price decrease
10.00%
Unit COGS
$107.50
Annual % COGS decrease
5.00%
New salaried technician
$100,000
$110,000
$120,000
Investment
$350,000
Forecasted sales quantities
340,000
540,000
1,000,000
Working capital
$750,000
$775,000
$725,000
$675,000
Depreciation
$510,000
$460,000
$400,000
Income Tax rate
14.00%
Capital Gains tax rate
10.50%
MARR
20.00% 2 An investment committee has narrowed down their investment decision to three proposals. Further information was collected on these three
proposals and the investment amounts, estimated annual cash flows, and estimated salvage values are shown Use a MARR of 15% and a three year
Determine which one maximizes the financial worth of the company using the internal rate of return criterion only. below.
time horizon The committee only considers the IRR criterion.
Proposal
Investment
A1
A2
A3
MARR
Years 3 ($1,250,000)
($1,050,000)
($1,750,000) Year 2 Year 3 $640,000
$500,000
$700,000 $250,000
$600,000
$800,000 Salvage in last
year
$300,000
$350,000
$750,000 15.0%
3 Customers-R-Us, LLC had sales and costs as shown below in 2013. Any data that is not listed should be considered as zero. Note that the parts are produced
in lots of 10,000, so the setup costs are incurred each time that 10,000 parts needs to be produced.
a
What total costs (variable plus fixed) will be incurred in 2013?

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