Answered: Calculate the initial outlay, after-tax…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 14E: Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell...

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Chicago Turkey is considering a new turkey to service its western region stores. The stores currently require 650,000 turkeys per year, and they are purchased from various local turkey farms for an average price of $8 per bird. The managers believe that their new farm would lower the cost per bird to $7, while maintaining the average selling price of $12 per bird. However, due to the centralized structure of this operation, shipping expenses will increase to $1.25 per bird from the current $1.00. The firm will need to increase its inventory of live turkeys by $45,000. It will cost $200,000 to purchase the land and $350,000 to construct the buildings and purchase equipment. In addition, labor expenses will rise by $250,000 per year. The buildings and equipment will be depreciated using the straight-line method over five years to a salvage value of $100,000. After five years, the company will sell the farm for $300,000 ($100,000 for the buildings and equipment, $200,000 for the land). The firm’s marginal tax rate is 25%. Note that land is not depreciable.

Calculate the initial outlay, after-tax cash flows, and terminal cash flow for this project.
If the WACC is 12%, calculate the payback period discounted payback period, NPV, PI, IRR, and MIRR.

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