Question

Shrieves Casting Company is considering adding a new line to its product mix, and the company hires you, a recently business school graduate, to conduct capital budgeting analysis. The production line would be set up in unused space in Shrieves' 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 would be a class 8 with a 20% CCA rate. 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 1,250 units per year for four 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 expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net operating working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 28%, and its overall weighted average cost of capital is 10 percent. Suppose the firm had spent $100,000 last year to rehabilitate the production line site.Assume that the plant space could be leased out to another firm at $25,000 a year.     

What is the project's after-tax NPV? Should the project proceed? Prepare a report including capital budgeting, risk analysis and comments. ( I appreciate it if you give me the detail of calculating, I have a problem in calculating that. )

Answer 1