FINANCIAL MANAGEMENT: THEORY AND PRACT
15th Edition
ISBN: 9781305632455
Author: BRIGHAM E. F.
Publisher: CENGAGE L
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Chapter 11, Problem 3MC
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 reason why inflation significant in
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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,…
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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…
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing
warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $120,000, and
thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an
investment in plant and equipment of $1.32 million. This could be depreciated for tax purposes straight-line over 10 years. However,
Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $440,000. Finally, the
project requires an immediate investment in working capital of $370,000. Thereafter, working capital is forecasted to be 10% of sales in
each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are
expected to be $4.60 million, and thereafter, sales are forecasted…
Chapter 11 Solutions
FINANCIAL MANAGEMENT: THEORY AND PRACT
Ch. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 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. 11QCh. 11 - Prob. 1P
Ch. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 10PCh. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 14MC
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