Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Solve Question h Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by

Solve Question h
image text in transcribed
image text in transcribed
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 machinery's invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional S30,000 to install the equip- ment. 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 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit carn 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 firm's net working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%. a. Define "incremental cash flow. (1) Should you subtract interest expense or dividends when calculating project cash (2) Suppose the firm spent $100,000 last year to rehabilitate the production line site. (3) Now assume the plant space could be leased out to another firm at $25,000 per (4) Finally, assume that the new product line is expected to decrease sales of the firm's flow? Should this be included in the analysis? Explain. year. Should this be included in the analysis? If so, how? other lines by $50,000 per year. Should this be considered in the analysis? If so, how

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Management

Authors: Eugene F. Brigham, Phillip R. Daves

7th Edition

0030333288, 9780030333286

More Books

Students also viewed these Finance questions