Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
15th Edition
ISBN: 9781337130295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 11, Problem 1MC

a)

Summary Introduction

Case summary:

Company S desires to add a new line to its product mix. For the purpose of this the analysis of capital budgeting are conducted by person X an MBA graduate. In order to set up this a machinery should be installed. For this installation company incurred certain additional expenses such as installation expenses and shipping charge etc. The machinery has a 4 years’ life with a salvage value of $25000.

The new line leads to increase sales. 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 and weighted average cost of capital for an average project is 10%.

To discuss: The incremental cash flow.

1)

Summary Introduction

To discuss: Whether subtract expense of interest or dividends if computing project cash flow.

2)

Summary Introduction

To discuss: Whether the cost of rehabilitation comprised in this analysis.

3)

Summary Introduction

To discuss: Whether leased plant space comprises in this analysis and show how it is including.

4)

Summary Introduction

To discuss: Whether new product line anticipated to decrease sales of the company’s other lines by $50,000 is included in this examination and the manner in which it considers.

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