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 recent business school graduate. The production line would be set up in unused space in Shrieves's main plant. The machinery's 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 would be in Class 8 with a CCA rate of 20%. 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. Furthermore, to handle the new line, the firm's net operating working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 28%, and its overall weighted average cost of capital is 10%

. d. Estimate the required net operating working capital for each year and the cash flow due to investments in net operating working capital.

e. Calculate the present value of the CCA tax shield.

f. What is the after-tax salvage cash flows?

g. What is the project's NPV? Should the project should be undertaken?

h. What does the term "risk" mean in the context of capital budgeting? To what extent can risk be quantified? When risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?

i. (1) What are the three types of risk that are relevant in capital budgeting? (2) How is each of these risk types measured, and how do they relate to one another? (3) How is each type of risk used in the capital budgeting process?

j. (1) What is sensitivity analysis? (2) Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume that each of these variables can vary from its base-case, or expected, value by 10% and 20%. Include a sensitivity diagram, and discuss the results. (3) What is the primary weakness of sensitivity analysis? What is its primary usefulness?

Not in excel.