ABC is considering adding a new line to its product mix, and you are conducting the capital budgeting analysis for this proposed project. The production line would be set up in unused space in the firm's main plant. The machinerys invoice price would be approximately $350,000, another $15,000 in shipping charges would be required, and it would cost an additional $25,000 to install the equipment. The machinery has an economic life of 4 years, and the firm has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 2% per year, though no other variable is expected to change. Further, to handle the new line, the firms net working capital would have to increase in the first year of operation by an amount equal to 12% of sales revenues. The firms tax rate is 21%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 14%.

Calculate the after-tax salvage cash flow. After-tax Salvage Value Based on facts in case: Salvage value Book value Gain or loss Tax on salvage value Net terminal cash flow Calculate the net cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, PI, and payback? Do these indicators suggest that the project should be undertaken? Find Projected Net Cash Flows and NPV, IRR Year 0 Year 1 Year 2 Year 3 Year 4 Investment Outlay: Long Term Assets Operating Cash Flows from Project Change in CF due to investment in NWC Salvage Cash Flows

Net Cash Flows NPV = IRR = PI = Find Payback Years 0 1 2 3 4 Cash Flow Cumulative Cash Flow for Payback Payback =