A rapid rate of growth in sales and profits may require:
Answer
higher dividend payments to shareholders.
increased borrowing by the firm to support the sales increase.
the firm to be more lenient with credit customers.
sales forecasts to be made less frequently.
Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. Based on this information you are to complete the following tasks.
Prepare a statement showing the incremental cash flows for this project over an 8-year period.
Calculate the Payback Period (P/B) and the NPV for the project.
Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.
If the project required additional investment in land and building, how would this affect your decision? Explain
A rapid rate of growth in sales and profits may require increased borrowing by the firm to support the sales increase.
To understand this, let's break down the options and see which one is most likely to be true.
1. Higher dividend payments to shareholders: Dividend payments are usually made from profits that a company generates. If a company is experiencing a rapid rate of growth in sales and profits, it may choose to use those profits to reinvest in the business to support further growth, rather than distributing them as dividends.
2. Increased borrowing by the firm to support the sales increase: When a company experiences rapid growth in sales and profits, it may need additional funds to support that growth. Borrowing money through loans or debt issuances can provide the necessary capital to invest in expanding operations, increasing production capacity, or entering new markets.
3. The firm to be more lenient with credit customers: Being more lenient with credit customers means extending credit and allowing customers to delay payment. While this may encourage sales in the short term, it can create cash flow problems for the company if customers do not pay on time. Therefore, being more lenient with credit customers may not be the best option for a company experiencing rapid growth, as it could lead to liquidity issues.
4. Sales forecasts to be made less frequently: Sales forecasts are important for managing a company's operations and planning for future growth. Making them less frequently would make it harder to track and respond to changes in sales trends. Therefore, making sales forecasts less frequently is unlikely to be necessary or beneficial for a company experiencing rapid growth.
Based on the options given, the most likely choice that a rapid rate of growth in sales and profits may require is increased borrowing by the firm to support the sales increase.