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Erin Griff, manager of the Cal Division of the N Corp




Question;Erin Griff, manager of the Cal Division of the N Corp is trying to decide whether to launch a new model of blender, BF87.;Griff is particularly excited about this proposal because it calls for producing the product in the company?s old plant at St. Franc, Griff?s home town.;During the last recession, N Corp had to shut down this plant and lay off its workers, many of whom had grown up with Griff and were his friends.;Griff had been very upset when the plant was closed down.;If BF87 were produced in the new plant, most of the laid-off workers would be rehired.;Griff asks XXXXX XXXXX, the management accountant of the Cal Division to analyze the BF87 proposal.;Through the years the company has found that its products have a useful life of 6 years, after which the product is dropped and replaced by another new product.;Chan gathers the following data;a. BF87 will require new special-purpose equipment costing $900,000.;The useful life of the equipment is 6 years, with a $140,000 estimated terminal disposal price at that time.;However, the income tax authorities will not allow a write-off based on a life shorter than 9 years.;Therefore, the new equipment would be written off over 9 years for tax purposes, using the straight-line depreciation method and assuming a zero terminal disposal price.;b. The old plant has a book value of $250,000 and is being depreciated on a straight-line basis at $25,000 annually.;The plant is currently being leased to another company.;This lease has 6 years remaining at an annual rental of $45,000.;The lease contains a cancellation clause whereby the landlord can obtain immediate possession of the premises upon payment of $30,000 cash (fully deductible for income tax purposes).;c. Certain nonrecurring market-research studies and sales-promotion activities will amount to a cost of $300,000 at the end of year 1.;The entire amount is deductible in full for income tax purposes in the year of expenditure.;d. Additions to working capital will require $200,000 at the outset and an additional $200,000 at the end of 2 years.;This total is fully recoverable at the end of 6 years.;e. Net cash inflow from operations before depreciation and income taxes are expected to be $400,000 in years 1 and 2, $600,000 in years 3-5, and $100,000 in year 6.;The after-tax required rate of return is 12%.;The income tax rate is 36%.;REQUIRED DISCUSSION QUESTIONS;1. Use a net present-value analysis to determine whether Chan should recommend launching BF87.;2. Chan learns that the working capital required will be twice the amounts estimated in the preceding analysis.;All other data remain unchanged.;She revises her analysis and presents it to Griff.;Griff is very unhappy with what he sees.;He tells Chan ?Try different assumptions and redo your analysis. I have no doubt that this project should be worth pursuing on financial grounds.?;Chan is aware of Griff?s interest in supporting his home-town community.;There is also the possibility that Griff may be hired as a consultant by the new plant management after he retires next year.Why is Griff unhappy with Chan?s revised analysis?;How should Chan respond to Griff?s suggestions?;Identify the specific steps that Chan should take to resolve this situation.


Paper#50344 | Written in 18-Jul-2015

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