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 se up in unused space in Shrieves' main plant. The machinery's invoice price would be approximately $250,000 another $25,000 in shipping charges would be required, and it would cost an additional $20,000 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 $35,000 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 S 140 per unit in the first year, excluding depreciation. Each unit can be sold for $250 in the first year. The sale price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net operating working capital would have to increase by an amount equal to 12% of next year's sales revenues. The firm's tax rate is 25%, and its overall weighted average cost of capital is 10%. 1. What is the key output? Analysis of New Expansion Project Part 1: Input Data Equipment cost $250,000 Shipping charge Tastallation charge $25,000 $20,000 Economic Life 4 Salvage Valer $35,000 Key Output NPV - Tax Rate Cost of Capital Units Sold Sales Price Per Unit Incremental Cost Per Calt NOWC/Sales Inflation rate Model Shout2 Shaw 25% 10% 1,500 $250 price merease 3% each year. $140 cost will increase inflation 396 each year. 12% NWC-12% of next year expected sales. Show all Images
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 se up in unused space in Shrieves' main plant. The machinery's invoice price would be approximately $250,000 another $25,000 in shipping charges would be required, and it would cost an additional $20,000 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 $35,000 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 S 140 per unit in the first year, excluding depreciation. Each unit can be sold for $250 in the first year. The sale price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net operating working capital would have to increase by an amount equal to 12% of next year's sales revenues. The firm's tax rate is 25%, and its overall weighted average cost of capital is 10%. 1. What is the key output? Analysis of New Expansion Project Part 1: Input Data Equipment cost $250,000 Shipping charge Tastallation charge $25,000 $20,000 Economic Life 4 Salvage Valer $35,000 Key Output NPV - Tax Rate Cost of Capital Units Sold Sales Price Per Unit Incremental Cost Per Calt NOWC/Sales Inflation rate Model Shout2 Shaw 25% 10% 1,500 $250 price merease 3% each year. $140 cost will increase inflation 396 each year. 12% NWC-12% of next year expected sales. Show all Images
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1aM
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Transcribed Image Text: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 se
up in unused space in Shrieves' main plant. The machinery's invoice price would be approximately $250,000
another $25,000 in shipping charges would be required, and it would cost an additional $20,000 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
$35,000 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 S
140 per unit in the first year, excluding depreciation. Each unit can be sold for $250 in the first year. The sale
price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the
firm's net operating working capital would have to increase by an amount equal to 12% of next year's sales
revenues. The firm's tax rate is 25%, and its overall weighted average cost of capital is 10%.
1. What is the key output?
Analysis of New Expansion Project
Part 1: Input Data
Equipment cost
$250,000
Shipping charge
Tastallation charge
$25,000
$20,000
Economic Life
4
Salvage Valer
$35,000
Key Output NPV -
Tax Rate
Cost of Capital
Units Sold
Sales Price Per Unit
Incremental Cost Per Calt
NOWC/Sales
Inflation rate
Model Shout2 Shaw
25%
10%
1,500
$250 price merease 3% each year.
$140 cost will increase inflation 396 each year.
12% NWC-12% of next year expected sales.
Show all Images
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