Question
Question 1. (10 points) ABC Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by
Question 1. (10 points) ABC 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 ABC' main plant. The machinerys invoice price would be approximately $250,000; another $20,000 in shipping and insurance 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 ABC has obtained a tax ruling which places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $11,000 after 4 years of use. The new line would generate incremental sales of 1,500 units per year for four 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 expected to increase by 6% per year due to inflation. Further, to handle the new line, the firms net operating working capital(t) would have to increase by an amount equal to 10% of sales revenues (t+1). The firms tax rate is 40 percent, and its overall weighted average cost of capital is 10 percent. Year Depreciation Rate 1 33% 2 45 3 15 4 7 Calculate NPV of the project. (Hint: You have to calculate Year0, Year1, Year2, Year3, and Year 4 cash flows)
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