Allied Products Assignment
Allied Products Assignment
Allied Products, Inc., has recently won approval from the Federal Aviation Administration (FAA) for its Enhanced Ground Proximity Warning System (GPWS). This system is designed to give airplane pilots additional warning of approaching ground danger and thus help prevent crashes. Allied Products has spent $10 million in research and development the past four years developing GPWS. The GPWS will be put on the market beginning this year and Allied Products expects it to stay on the market for a total of five years.
As a financial analyst specializing in the aerospace industry for USC Pension & Investment, Inc., you are asked by your managing partner, Mr. Adam Smith, to evaluate the potential of this new GPWS project.
Initially, Allied Products will need to acquire $42 million in production equipment to make the GPWS. The equipment is expected to have a seven-year useful life. This equipment can be sold for $12 million at the end of five years. Allied Products intends to sell two different versions of the GPWS:
1. New GPWS – intended for installation in new aircraft. The selling price is $70,000 per system and the variable cost of production is $50,000 per system. (Assume cash flows occur at year-end.)
2. Upgrade GPWS – intended for installation on existing aircraft with an older version ground proximity radar in place. The selling price of the Upgrade system is $35,000 per system and the variable cost to produce it is $22,000 per system.
Allied Products intends to raise prices at the same rate as inflation. Variable costs will also increase with inflation. In addition, the GPWS project will also incur $3 million in marketing and general administration costs the first year (expected to increase at the same rate as inflation).
Allied Products’ corporate tax rate is 40 percent. Assume that the equity beta estimated by your equity analyst is 1.2 and is the best estimate of Allied Products’ beta. The
Allied Products, Inc., has recently won approval from the Federal Aviation Administration (FAA) for its Enhanced Ground Proximity Warning System (GPWS). This system is designed to give airplane pilots additional warning of approaching ground danger and thus help prevent crashes. Allied Products has spent $10 million in research and development the past four years developing GPWS. The GPWS will be put on the market beginning this year and Allied Products expects it to stay on the market for a total of five years.
As a financial analyst specializing in the aerospace industry for USC Pension & Investment, Inc., you are asked by your managing partner, Mr. Adam Smith, to evaluate the potential of this new GPWS project.
Initially, Allied Products will need to acquire $42 million in production equipment to make the GPWS. The equipment is expected to have a seven-year useful life. This equipment can be sold for $12 million at the end of five years. Allied Products intends to sell two different versions of the GPWS:
1. New GPWS – intended for installation in new aircraft. The selling price is $70,000 per system and the variable cost of production is $50,000 per system. (Assume cash flows occur at year-end.)
2. Upgrade GPWS – intended for installation on existing aircraft with an older version ground proximity radar in place. The selling price of the Upgrade system is $35,000 per system and the variable cost to produce it is $22,000 per system.
Allied Products intends to raise prices at the same rate as inflation. Variable costs will also increase with inflation. In addition, the GPWS project will also incur $3 million in marketing and general administration costs the first year (expected to increase at the same rate as inflation).
Allied Products’ corporate tax rate is 40 percent. Assume that the equity beta estimated by your equity analyst is 1.2 and is the best estimate of Allied Products’ beta. The