Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOWs main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000.

The new product line would generate incremental sales of 1,350 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 each in the first year. The sales price and cost are 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 15% of sales revenues. The firms tax rate is 40%, and its overall weighted average cost of capital is 12%.

1. Calculate and provide the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows?
2. Construct 4 years of annual incremental operating cash flow statements for IOW Casting Company. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital. Calculate the after-tax salvage cash flow.
3. Calculate the net cash flows for each of the 4 years. Based on these cash flows, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest the project should be undertaken? Explain.
4. What does the term risk mean in the context of capital budgeting? To what extent can risk be quantified, and, when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates? Provide your rationale.
5. Describes sensitivity analysis and discuss a) its primary weakness; and b) its primary usefulness? For the IOW project, perform a sensitivity analysis on the unit sales, salvage value, and cost of capital. Assume that each of these variables can vary from its expected, or base-case value by 10%, 20%, and 30%. Include a sensitivity diagram, and discuss the results.
6. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the projects cash flows except unit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the projects expected NPV, standard deviation, and coefficient of variation.
7. Explain scenario analysis and any problems, issues, or concerns that surround this type of projection.
8. Define simulation analysis, and discuss its principal advantages and disadvantages.
9. Assume that IOWs average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here?
10. IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain.
11. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

Provide all work in your answers that requires calculations.

Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 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 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. 1. Calculate and provide the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows? 2. Construct 4 years of annual incremental operating cash flow statements for IOW Casting Company. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital. Calculate the after-tax salvage cash flow. 3. Calculate the net cash flows for each of the 4 years. Based on these cash flows, what are the project's NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest the project should be undertaken? Explain. 4. What does the term \"risk\" mean in the context of capital budgeting? To what extent can risk be quantified, and, when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates? Provide your rationale. 5. Describes sensitivity analysis and discuss a) its primary weakness; and b) its primary usefulness? For the IOW project, perform a sensitivity analysis on the unit sales, salvage value, and cost of capital. Assume that each of these variables can vary from its expected, or \"base-case\" value by 10%, 20%, and 30%. Include a sensitivity diagram, and discuss the results. 6. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flows except unit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. 7. Explain scenario analysis and any problems, issues, or concerns that surround this type of projection. 8. Define simulation analysis, and discuss its principal advantages and disadvantages. 9. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? 10. IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. 11. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project. Provide all work in your answers that requires calculations. Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion. ics Case Study: Project Valuation and Risk Analysis 1 2 3 Unsatisfactor Less than Satisfactory y Satisfactory 79.00% 0.00% 74.00% 70.0 %Content 6.0 % Provides Not included. sales revenues and cost calculations with a discussion of inflation related to cash flow estimation. 7.0 % Provides Not included. annual 4 Good 87.00% 5 Excellent 100.00% Submission Submission Submission Submission provides sales provides sales provides sales provides sales revenues and/or revenues and revenues and revenues and cost cost calculations cost calculations cost calculations calculations with a with a discussion with a discussion with a discussion discussion of of inflation of inflation of inflation inflation related to related to cash related to cash related to cash cash flow flow estimation, flow estimation, flow estimation estimation but the but minimal in full. The comprehensively. information detail or support submission The submission provided is is provided for further additionally incomplete, one or more encompasses incorporates inaccurate, or components. essential details analysis of otherwise and provides supporting deficient. appropriate evidence support. insightfully and provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission fully Submission provides annual provides annual provides annual comprehensively incremental operating cash flow statements, required net working capital estimates, investmentgenerated cash flow, and after-tax salvage cash flow. 7.0 % Provides Not included. net cash flows with associated indicator calculations for the selected scenario: NPV, IRR, MIRR, PI, payback, and discounted payback. Links value of indicator results to project viability. 7.0 % Not included. Discusses risk in the context of capital budgeting, how risk can be quantified, and specified methods of incremental incremental incremental provides annual operating cash operating cash operating cash incremental flow statements, flow statements, flow statements, operating cash flow and/or required required net required net statements, net working working capital working capital required net capital estimates, estimates, working capital estimates, investmentinvestmentestimates, and/or generated cash generated cash investmentinvestmentflow, and after- flow, and after- generated cash generated cash tax salvage cash tax salvage cash flow, and after-tax flow, and/or flow, but flow. The salvage cash flow. after-tax salvage minimal detail or submission The submission cash flow, but support is encompasses further the information provided for one essential details incorporates provided is or more and provides analysis of incomplete, components. appropriate supporting inaccurate, or support. evidence otherwise insightfully and deficient. provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission Submission provides net provides net provides net comprehensively cash flows with cash flows with cash flows with provides net cash associated associated associated flows with indicator indicator indicator associated calculations for calculations for calculations for indicator the selected the selected the selected calculations for the scenario: NPV, scenario: NPV, scenario in full: selected scenario: IRR, MIRR, PI, IRR, MIRR, PI, NPV, IRR, MIRR, NPV, IRR, MIRR, PI, payback, and payback, and PI, payback, and payback, and discounted discounted discounted discounted payback. payback. payback. payback. Submission links Submission links Submission Submission further value of value of further links comprehensively indicator results indicator results value of links value of to project to project indicator results indicator results to viability. viability. Minimal to project project viability. Information for detail or support viability in full. The submission one of the other is provided for The submission further requirement is one or more encompasses incorporates incomplete, components. essential details analysis of inaccurate, or and provides supporting otherwise appropriate evidence deficient. support. insightfully and provides specific examples with relevance. Level of detail is appropriate. A discussion of A discussion of A discussion of A discussion of risk risk in the risk in the risk in the in the context of context of context of context of capital budgeting, capital capital capital how risk can be budgeting, how budgeting, how budgeting, how quantified, and risk can be risk can be risk can be specified methods quantified, quantified, and quantified, and of risk and/or specified specified specified quantification is methods of risk methods of risk methods of risk present and risk quantification. 7.0 % Not included. Describes sensitivity analysis, its primary weakness, and primary usefulness. Provides a sensitivity analysis diagram with discussion on unit sales, salvage value, and cost of capital using variance characteristics specified in the scenario. 7.0 % Not included. Describes best and worst case NPV for the specified scenario. Provides an analysis of the specified NPVs inclusive of expected NPV, standard deviation, and coefficient of variation. quantification is present, but information provided is incomplete, inaccurate, or otherwise deficient. quantification is quantification is present, but present in full. minimal detail or The submission support is encompasses provided for one essential details or more and provides components. appropriate support. comprehensive. The submission further incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission Submission describes describes describes describes sensitivity sensitivity sensitivity sensitivity analysis analysis and analysis and analysis and and required required required required characteristics, and characteristics, characteristics, characteristics, a sensitivity and/or a and a sensitivity and a sensitivity analysis diagram sensitivity analysis diagram analysis diagram as parameters analysis diagram as parameters as parameters require is present as parameters require is require is and require, but the incorporated. incorporated in comprehensive. information Minimal detail or full. The The submission provided is support is submission further incomplete, provided for one encompasses incorporates inaccurate, or or more essential details analysis of otherwise components. and provides supporting deficient. appropriate evidence support. insightfully and provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission Submission describes best describes best describes best describes best and and worst case and worst case and worst case worst case NPV for NPV for the NPV for the NPV for the the specified specified specified specified scenario and scenario and scenario and scenario and provides an provides an provides an provides an analysis of the analysis of the analysis of the analysis of the specified NPV specified NPV specified NPV specified NPV variables. A variables. A variables. A variables. A discussion of risk discussion of risk discussion of risk discussion of risk premium and the premium and the premium and premium and relationship to relationship to the relationship the relationship portfolio portfolio to portfolio to portfolio diversification is diversification is diversification is diversification is comprehensive. also incorporated, incorporated in The submission incorporated, but but minimal full. The further the information detail or support submission incorporates provided in one is provided for encompasses analysis of or more of these one or more essential details supporting elements is components. and provides evidence incomplete, appropriate insightfully and inaccurate, or support. provides specific otherwise examples with deficient. relevance. Level of 5.0 % Explains Not included. scenario analysis projection and associated problems, issues, or concerns. 5.0 % Defines Not included. and discusses the principal advantages and disadvantages of simulation analysis. 7.0 % Not included. Discusses risk type and classification based on provided scenario variation coefficients. detail is appropriate. 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Submission Submission Submission Submission defines defines and defines and defines and and discusses the discusses the discusses the discusses the principal principal principal principal advantages and advantages and advantages and advantages and disadvantages of disadvantages of disadvantages of disadvantages of simulation analysis. simulation simulation simulation All requirements analysis, but the analysis, but analysis in full. are incorporated in information minimal detail or The submission full and provided is support is encompasses comprehensively. incomplete, provided for one essential details The submission inaccurate, or or more and provides further otherwise components. appropriate incorporates deficient. support. analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate. A discussion of A discussion of A discussion of A discussion of risk risk type and risk type and risk type and type and classification classification classification classification based based on based on based on on provided provided provided provided scenario variation scenario scenario scenario coefficients is variation variation variation present and coefficients is coefficients is coefficients is comprehensive. present, but the present, but incorporated in The submission information minimal detail or full. The further provided is incomplete, inaccurate, or otherwise deficient. 6.0 % Not included. Assesses feasibility of new product line based on cost of capital projections provided in the specified scenario. 6.0 % Not included. Describes other subjective risk factors and the potential impact of each to new product line feasibility. incorporates analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission Submission assesses the assesses the assesses the comprehensively feasibility of the feasibility of the feasibility of the assesses the new product line new product line new product line feasibility of the based on cost of based on cost of based on cost of new product line capital capital capital based on cost of projections projections projections capital projections provided in the provided in the provided in the provided in the specified specified specified specified scenario. scenario, but the scenario, but scenario in full. The submission information minimal detail or The submission further provided is support is encompasses incorporates incomplete, provided for one essential details analysis of inaccurate, or or more and provides supporting otherwise components. appropriate evidence deficient. support. insightfully and provides specific examples with relevance. Level of detail is appropriate. Submission Submission Submission Submission describes other describes other describes other comprehensively subjective risk subjective risk subjective risk describes other factors and the factors and the factors and the subjective risk potential impact potential impact potential impact factors and the of each to new of each to new of each to new potential impact of product line product line product line each to new feasibility, but feasibility, but feasibility in full. product line the information minimal detail or The submission feasibility provided is support is encompasses comprehensive. incomplete, provided for one essential details The submission inaccurate, or or more and provides further otherwise components. appropriate incorporates deficient. support. analysis of supporting evidence insightfully and provides specific examples with relevance. Level of detail is appropriate. 20.0 %Organization and Effectiveness 7.0 % Thesis Paper lacks Thesis is Development any discernible insufficiently and Purpose overall developed or purpose or vague. Purpose support is provided for one or more components. submission encompasses essential details and provides appropriate support. Thesis is apparent and appropriate to purpose. Thesis is clear Thesis is and forecasts comprehensive and the development contains the of the paper. essence of the organizing claim. is not clear. Thesis is paper. Thesis descriptive and statement makes reflective of the the purpose of the arguments and paper clear. appropriate to the purpose. 8.0 % Statement of Sufficient Argument is Argument shows Clear and Argument purpose is not justification of orderly, but may logical convincing Logic and justified by the claims is lacking. have a few progressions. argument that Construction conclusion. Argument lacks inconsistencies. Techniques of presents a The conclusion consistent unity. The argument argumentation persuasive claim in does not There are presents are evident. a distinctive and support the obvious flaws in minimal There is a compelling claim made. the logic. Some justification of smooth manner. All sources Argument is sources have claims. progression of are authoritative. incoherent and questionable Argument claims from uses credibility. logically, but not introduction to noncredible thoroughly, conclusion. Most sources. supports the sources are purpose. authoritative. Sources used are credible. Introduction and conclusion bracket the thesis. 5.0 % Surface errors Frequent and Some Prose is largely Writer is clearly in Mechanics of are pervasive repetitive mechanical free of command of Writing enough that mechanical errors or typos mechanical standard, written, (includes they impede errors distract are present, but errors, although academic English. spelling, communicatio the reader. they are not a few may be punctuation, n of meaning. Inconsistencies overly present. The grammar, Inappropriate in language distracting to writer uses a language use) word choice or choice (register) the reader. variety of sentence or word choice Correct and effective construction is are present. varied sentence sentence used. Sentence structure and structures and structure is audiencefigures of correct but not appropriate speech. varied. language are employed. 10.0 %Format 5.0 % Paper Template is not Appropriate Appropriate Appropriate All format elements Format (use of used template is used, template is template is fully are correct. appropriate appropriately but some used. Formatting used. There are style for the or elements are is correct, virtually no major and documentation missing or although some errors in assignment) format is rarely mistaken. A lack minor errors formatting style. followed of control with may be present. correctly. formatting is apparent. 5.0 % Sources are Documentation Sources are Sources are Sources are Documentatio not of sources is documented, as documented, as completely and n of Sources documented. inconsistent or appropriate to appropriate to correctly (citations, incorrect, as assignment and assignment and documented, as footnotes, appropriate to style, although style, and format appropriate to references, assignment and some formatting is mostly assignment and bibliography, style, with errors may be correct. style, and format is etc., as numerous present. free of error. appropriate to formatting assignment errors. and style) 100 % Total Weightage