Company S desires to add a new line to its product mix. For this purpose the analysis of capital budgeting was conducted by person S an MBA graduate. The invoice price of the machinery is $200,000 approximately and $10,000 shipping charges are required. Installation charges are $30,000. The machinery has a 4 years’ life with a salvage value of $25000. The new line leads to increase the sales of 1,250 units each year of 4 years and cost of $100 per unit in first year. The units are sold for $200 in the 1 st year. It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 40% and risk adjusted cost of capital or weighted average cost of capital for an average project is 10%. Characters in the case: Company S Person S To discuss: The real options and kinds of real options.

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Chapter 11, Problem 14MC

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Case summary:

Company S desires to add a new line to its product mix. For this purpose the analysis of capital budgeting was conducted by person S an MBA graduate. The invoice price of the machinery is $200,000 approximately and $10,000 shipping charges are required. Installation charges are $30,000. The machinery has a 4 years’ life with a salvage value of $25000.

The new line leads to increase the sales of 1,250 units each year of 4 years and cost of $100 per unit in first year. The units are sold for $200 in the 1^st year.

It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 40% and risk adjusted cost of capital or weighted average cost of capital for an average project is 10%.

Characters in the case:

Company S

Person S

To discuss: The real options and kinds of real options.

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