
a)
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)
To discuss: Whether subtract expense of interest or dividends if computing project cash flow.
2)
To discuss: Whether the cost of rehabilitation comprised in this analysis.
3)
To discuss: Whether leased plant space comprises in this analysis and show how it is including.
4)
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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Chapter 11 Solutions
Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
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