Shrieves Casting Company is considering adding a new line to its product mix, and the capital bud geting analysis is being conducted by Sidney John son, a recently graduated MBA. The production line would be set up in unused space in Shrieves main plant. The machinerys invoice price would be ap proximately $200,000, another $10,000 in shipping charges would be required, and it would cost an addi tional $30,000 to install the equipment. The machin ery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equip ment in the MACRS 3year 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 deprecia tion. 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%. A. Define incremental cash flow- the difference between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. (1) Should you subtract interest expense or dividends when calculating project cash flow? Yes (2) Suppose the firm spent $100,000 last year to rehabilitate the production line site. Should this be included in the analysis? Explain. Yes, because the amount is part of the capital expenditure. (3) Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be included in the analysis? If so, how? Yes, because it should be subtracted out of the annual revenue. (4) Finally, assume that the new product line is expected to decrease sales of the firms other lines by $50,000 per year. Should this be considered in the analysis? If so, how? Yes, it should also be subtracted out of the annual revenue. b. Disregard the assumptions in part a. What is Shrieves depreciable basis? What are the annual depreciation expenses? c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows? d. Construct annual incremental operating cash flow statements. e. Estimate the required net working capital for each year and the cash flow due to investments in net working capital. f. Calculate the aftertax salvage cash flow. g. Calculate the net cash flows for each year. Based on these cash flows, what are the projects NPV, IRR, MIRR, PI, payback, and discounted pay back? Do these indicators suggest that the proj ect should be undertaken?