Company S is considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year. Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equivalent to 12% of sales revenues. To discuss: Meaning of “risk” in the sense of capital budgeting and whether the risk can be quantified, if quantified, whether the quantification should be based on statistical analysis of historical data or on judgemental or subjective estimates.

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Chapter 13, Problem 8MC

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Company S is considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equivalent to 12% of sales revenues.

To discuss: Meaning of “risk” in the sense of capital budgeting and whether the risk can be quantified, if quantified, whether the quantification should be based on statistical analysis of historical data or on judgemental or subjective estimates.

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