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 the 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 1,000 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 25 , and its overall weighted average cost of capital, which is the risk adjusted cost of capital for an average project (r), is 10 What is the depreciable basis What are the annual depreciation expenses Calculate the annual sales revenues and costs (other than depreciation) Why is it important to include inflation when estimating cash flows Calculate annual net operating profit after sales (NOPAT) Then calculate the operating cash flows Estimate the required net operating working capital (NOWC) for each year and the cash flow due to changes in NOWC Calculate the after tax salvage cash flow Calculate the project cash flows for each year Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback Do these indicators suggest that the project should be undertaken 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 (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 oneanother (3) How is each type of risk used in the capital budgeting process

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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

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 the 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 1,000 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 25%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%.

What is the depreciable basis? What are the annual depreciation expenses?
Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows?
Calculate annual net operating profit after sales (NOPAT). Then calculate the operating cash flows.
Estimate the required net operating working capital (NOWC) for each year and the cash flow due to changes in NOWC.
Calculate the after-tax salvage cash flow.
Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?
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?
(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 oneanother? (3) How is each type of risk used in the capital budgeting process?