Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

Work on Excel and copy the clean answer table here: Rio Grande Industries is considering adding a new line to its product mix, and the

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
Work on Excel and copy the clean answer table here: Rio Grande Industries is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by you. The production line would be set up in unused space in Rio's main plant. The machinery's invoice price would be approximately $300,000, another $20,000 in shipping charges would be required, and it would cost an additional $80,000 to install the equipment. The machinery has an economic life of 4 years, and SC 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 $50,000 after 4 years of use. The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of $110 per unit in the first year, excluding depreciation. Each unit can be sold for $220 in the first year. The sales price and cost are both expected to increase by 2% 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 The new line would generate incremental sales of 1,500 units per year for 4 years at an incremental cost of $110 per unit in the first year, excluding depreciation. Each unit can be sold for $220 in the first year. The sales price and cost are both expected to increase by 2% 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 10% 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 14%. a. Calculate year 0 cash flows (depreciable asset + working capital needs) b. Calculate CF from salvage value in year 4 . Consider profits and taxes. c. Forecast the annual working capital investments. d. Calculate annual cashflows (also consider working capital investments, salvage, working capital recovery) e. Calculate NPV of the project. Should the project be accepted? Summary data Cost $300,000 Shipping 20,000 Installation 80,000 Economic Life 4 Market Salvage Value 50,000 Depreciation Method MACRs 4 Annual Unit Sales 1500 Unit sales price 200 Unit cost 100 Economic Life Market Salvage Value 50,000 Depreciation Method MACRs 4 Annual Unit Sales 1500 Unit sales price 200 Unit cost 100 Net working capital required (NWCt =10% ( Sales t+1) 10% Tax rate 40% Project cost of capital (WACC) 14% Inflation rate (on unit prices and costs) 2% Inflation rate (on unit prices and costs) Annual Depreciation (MACRS -3)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered 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

Students also viewed these Finance questions