ADVENTURES ADVANTAGE INC. In Tutorial Library

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TITLE: ADVENTURES ADVANTAGE INC.

CLASS / COURSE: Finance

QUESTION DESCRIPTION:

DATA FOR PROJECT TWO FOR ADVENTURES ADVANTAGE INC.
     
Situation:  The firm builds thrill rides for amusement and theme parks.  The rides are engineered at     
its headquarters in Tampa, Florida in collaboration with engineers in Incia and China.  Once    
designed production plans are engineered by a firm in Malaysia.  The components parts of the    
rides are manufactured in Mexico and Tampa.  The parts are then shipped to the sight of the    
park where a team assembles the rides, test them, and train the parks ride maintenance     
employees on inspection and upkeep on the rides.  It has been difficult finding machinists    
and pipefitters in Tampa, but Mexico has a surplus of this labor skill.  A plan has been     
forwarded to upper management to add a new factory in Mexico.  Below are the detailed    
needs for two alternative plans, one which is more labor intensive than the other.  Which    
     
Required:    
A.  Which alternative should be adoped?  Use net present value to decide.    
     Show calculations for each alternative on the respective worksheet.    
B.  If you think there are qualitative factors to consider beside the quantitative analysis     
     explain what they might be.    
   Note - put final conclusion and part B at the bottom of this worksheet.    
     
Data to be considered
     Revenue is not a relevant item since it will be the same using either plant.  The cost    
structures of the two plants will be different since one plan is labor intensive while the    
other has several automated processes.    
     The Tampa plant will be sold to help fund this new plant but is not relevant:    
         Selling price of land and plant    $              30,00,000
         Tax basis of land  $                   50,000  
         Tax basis of plant:    
               Original cost  $              45,00,000  
               Accumulated depreciation  $              35,00,000  
                   Tax basis  $              10,00,000  
         Gain on the sale    $              19,50,000
     
     Under alternative one the equipment will be shipped to Mexico at a cost of $500,000.    
In such a case the remaining tax value of $1,000,000 will be depreciated over four years    
on a straight line basis ($250,000 annually).    
     
     Under alternative two all new equipment will be purchased so the Tampa equipment will    
be sold as follows:    
   Selling price    $              15,00,000
   Tax basis of the equipment:    
      Original cost  $              50,00,000  
      Accumulated depreciation  $              40,00,000  
         Tax basis (mentioned above)  $              10,00,000  
   Gain on the sale    $                5,00,000
     
    Under either alternative new equipment will depreciated on a straight line basis over 10 years.    
The plant will be depreciated over 20 years on a straight line basis.      
    The plant will be reequiped after the ten years, so assume that the life of the project is ten years.    
    Tax rate of the firm 40.00%  
    Firm's cost of capital 12.00%  
     
   Alternatives 
   One   Two 
Initial costs:    
   Land ($1,000,000 not relevant since it is the same cost under either alternative)    
   New plant  $              35,00,000  $              50,00,000
   New equipment  $              20,00,000  $              35,00,000
Annual operating cost that will be different among the two alternatives:    
   Direct labor  $              50,00,000  $              30,00,000
   Overhead costs  $              20,00,000  $              30,00,000
Equipment overhaul at end of year 5  $              20,00,000  $                          -  
Disposal value of equipment in year 10  $                           0  $              10,00,000
Working capital needs  $                3,00,000  $                5,00,000
   Note - working capital is freed up at end of year 3 under either alternative.    
     

 

Thanks

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Corporate Finance
4. Investment and Portfolio Management

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