home / study / business / finance / finance questions and answers / Shrieves Casting Company Is Considering Adding A New Line To Its Product Mix, And The Capital ... Question: Shrieves Casting Company is considering adding a new line to its product mix, and the capital bud... Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrievess main plant. The machinerys invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves 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 1,250 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 3% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 12% of sales revenues. The firms tax rate is 40%, and its overall weighted average cost of capital is 10%. Year 0 Year 1 Year 2 Year 3 Year 4 Initial Outlay ($240,000) Oper Cash Flows $106,680 $120,450 $93,967 $88,680 CF Due To NOWC ($30,000) ($900) ($927) ($956) $32,783 Salvage Cash Flows $15,000 Net Cash Flows ($270,000) $105,780 $119,523 $93,011 $136,463 n. What is a real option? What are some types of real options?