Question

CASE-PART A

Shrieves Casting Company is considering adding a new product line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recent business school graduate. The production line would be set up in unused space in Shrieves’s main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required to acquire the machinery from the supplier, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years and would be in Class 8 with a CCA rate of 20%. 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 4 years at an incremental cost of $100 per unit, excluding depreciation. Each unit can be sold for $200. Furthermore, to handle the new line, the firm’s net operating working capital would be $80,000. The working capital would be sold for $80,000 at the end of its life. The firm’s tax rate is 30%, and its overall weighted average cost of capital is 10%.

CASE-PART B

The company would like to rerun the original information if sales only reaches 900 units per year.

REQUIRED:

DETERMINE WHETHER THE COMPANY GO AHEAD WITH THIS PROJECT OF ADDING A NEW PRODUCT LINE FOR PART A & B.

(I HAVE ATTACHED A SPREADSHEET FOR YOU TO LOOK AT WITH TWO SIMILAR PROBLEMS. IT SHOULD BE EASY TO WORK WITH SINCE MOST OF THE SPREAD SHEET HAS ALREADY BEEN CROSS REFERENCED FOR YOU. YOU ARE ALLOWED TO USE THE SPREADSHEET SOLUTION PROVIDED TO ANSWER THE CASE QUESTION PROVIDED ABOVE.)

Answer 1

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