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.

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Answer 1

Question

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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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 set up in unused space in the main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 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 $25,000 after 4 years of use. The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line,…

Prompt: 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 set up in unused space in the main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 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 $25,000 after 4 years of use. The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new…

Scottech is examining an investment opportunity that will involve buying $120,000 worth of equipment. They will need $10,000 in net working capital up front. Shipping will cost $5,000 and installation will cost $10,000. The firm paid a management consultant $4,000 to analyze this project, which is supposed to increase sales by $20,000 per year. If the firm accepts the project, they will have to spend $3,500 to train the employees to use the new equipment. The corporate tax rate is 21%. What is the initial outlay for the project? ($150,500) ($130,500) ($126,500) O ($148,500) O ($123,000)

Answer 2

Question

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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Answer 3

Question

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.

Expert Solution & Answer

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Answer 4

Question

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.

Expert Solution & Answer

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Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

1)

Summary Introduction

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

Answer 9

1)

Summary Introduction

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

Answer 10

2)

Summary Introduction

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

Answer 11

2)

Summary Introduction

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

Answer 12

3)

Summary Introduction

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

Answer 13

3)

Summary Introduction

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

Answer 14

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.

Answer 15

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.

Answer 16

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Answer 17

Expert Solution & Answer

Answer 18

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Answer 19

Ch. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4Q Ch. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11Q Ch. 11 - Prob. 1P

Solution Summary: The author explains that company S desires to add a new line to its product mix. The analysis of capital budgeting is conducted by person X an MBA graduate.

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

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

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

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