operating cash flow, and projected sales are flat. BioCom focuses
exclusively
on cutting-edge applications, so it expects to discontinue the new
monitor
after five years. At that time, it will sell the technology and used
manufacturing equipment to a foreign company for an estimated
$2,400,000.
Cost analysts have collected the following figures and submitted them
to the
treasurer‘s office for additional study and a final decision on whether
to
proceed. You, as assistant to the treasurer, must compute and evaluate
the
basic capital budgeting criteria. The project will initially increase
working
capital by $480,000, which the company will recover at the end of the
project when it sells remaining inventory and collects accounts
receivable.
The analysts are not quite sure if they should include $450,000 that
the
company already spent on research and development for the new
product.
They also disagree about whether the effect of the discontinued
monitor on
the company‘s overall operating cash flows is relevant to the decision
on the
new product line, so you must decide how to deal with these two
items.
Cost of new plant and equipment $24,000,000 Designs and prototypes
$ 450,000 Estimated salvage value of technology and equipment, end
of year 5 $ 2,400,000 First-year sales forecast $16,500,000 Projected
annual rate of sales increases 6% Cost of goods sold 40% of sales
Selling, general, and administrative expenses 5% of sales Annual
fixed cost $600,000 Operating cash flow from current desk sales
$1,650,000 Economic life of the project 5 years Initial change in net
working capital $480,000 Depreciation 5-year MACRS Tax rate 34%
Discount rate = cost of capital 9% QUESTIONS