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 in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. 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.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

W ' vo ra 1x 2 05:46 = ENG , 31-03-2020 ... o X IK124 . : X IK for IL I M IN 10 IP IQ IR IS IT IU V A D 121 122 123 124 125 126 127 128 129 130 131 132 133 134 CALCULATION OF OPERATING CASH FLOW SALES 250000 [1250 x 200] COSTS 125000 (1250 X 100) EBIT 125000 TAX 37500 OPERATING 87500 CASH FLOW 135 136 137 138 NOTE 139 PV OF ALL OPERATING CASH FLOW 140 87500 X PVIFA @ 10%, 4 YEARS 87500 X 3.16986545 277363.23 [ROUNDED] EXCEL: PVIFA @10%, 4 YEARS 3.16986545 141 142 143 144 CALCULATION OF PRESENT VALUE OF TAX SHIELD CT 1+0 5 SATI OPTION TO WAIT STEIN indiffEPS EBIT LEASE ... EAC MACRS RELEVANI MI-np-ir NPV BETA LEVERED REPLACEMENT BOND SLM GOLF IRR MACRS ...

W ' vo ra 1x 2 05:46 = ENG , 31-03-2020 ... o X IK165 2 IK ILIMIN 10 P IQ IR IS ITU IVA 143 144 CALCULATION OF PRESENT VALUE OF TAX SHIELD 145 PVCCATS = CM, 110 0,5 - Lab 1+ 146 147 148 149 150 151 C= COST OF EQUIPMENT d = DEPRECIATION RATE Tc = TAX RATE S-SALVAGE VALUE r=DISCOUNT RATE 240000 20% 30% 25000 10% 152 PVCCATS= PVCCATS = (( 240000*0.2*0.3)/(0.1 +0.2))*((1+0.5*0.1)/(1+0.1)) - ((25000*0.2*0.3)/(0.2 +0.1)*(1/((1+0.1)^4))) 42403.11 (ROUNDED 153 154 155 156 157 158 159 STEP 1 COST OF EQUIPMENT + WORKING CAPITAL = 240000 + 80000 = -320000 STEP 2 PRESENT VALUE OF OPERATING CASH FLOWS 277363.23 160 STEP 3 PVCCATS 42403.11 STEP 4 PV OF SALVAGE VALUE & WORKING CAPITAL 71716.41 (25000 + 80000) X PVIF @10%,4 YEARS = [(25000 + 80000) X 1/(1+0.10)^4 ] 161 162 163 164 165 166 ANSWER NPV = STEP 1 + STEP 2 + STEP 3 + STEP 4 71482.75 ... EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS ... ►

05:47 W © Vol. 1x 23 ENG F 31-03-2020 ... o X IP126 X IK for ILLIMIN Formula Bar 1Q Formula Bar IS IT IU V A 122 123 124 125 126] CASE B IF ONLY 900 UNITS ARE SOLD 127 128 129 130 131 132 133 134 CALCULATION OF OPERATING CASH FLOW SALES 180000 [900 X 200] COSTS 90000 [900 X 100] EBIT 90000 TAX 27000 OPERATING 63000 CASH FLOW PV OF ALL OPERATING CASH FLOW 135 136 137 138 139 140 141 142 143 144 145 63000 X PVIFA @ 10%, 4 YEARS 63000 X 3.16986545 199701.52 [ROUNDED] NOTE EXCEL: PVIFA @10%, 4 YEARS 3.16986545 CALCULATION OF PRESENT VALUE OF TAX SHIELD PVCCATS CT 11+0.57) - $dT 1.11 اعمه ... EAC MACRS RELEVANI MI-np-ir NPV PVCCATS = REPLACEMENT BOND OPTION TO WAIT BETA LEVERED STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS ...

vor hx 9 ENG , W | 05:47 E 31-03-2020 ... o X IT150 - X fir IK ILIM IN 10 P 1Q IR IS ITU IVA 142 143 CALCULATION OF PRESENT VALUE OF TAX SHIELD + 0 r Sd 144 145 146 147 PVCCATS = PVCCATS = ca .0,5 - tip 1-C dtr red ltr 148 149 C= COST OF EQUIPMENT d = DEPRECIATION RATE Tc = TAX RATE S-SALVAGE VALUE r=DISCOUNT RATE 240000 20% 30% 25000 10% 150 151 152 153 PVCCATS= PVCCATS = (( 240000*0.2*0.3)/(0.1 +0.2))*((1+0.5*0.1)/(1+0.1)) - ((25000*0.2*0.3)/(0.2 +0.1)*(1/((1+0.1)^4))) 42403.11 (ROUNDED] 154 155 156 STEP 1 COST OF EQUIPMENT + WORKING CAPITAL = 240000 + 80000 = -320000 157 STEP 2 PRESENT VALUE OF OPERATING CASH FLOWS 199701.52 158 159 160 STEP 3 PVCCATS 42403.11 161 STEP 4 PV OF SALVAGE VALUE & WORKING CAPITAL 71716.41 (25000 + 80000) X PVIF @10%,4 YEARS = [(25000 + 80000) X 1/(1+0.10)^4] 162 163 164 165 1 ANSWER NPV = STEP 1 + STEP 2 + STEP 3 + STEP 4 -6178.95 ... EAC MACRS RELEVANT MI-np-ir NPV | BETA LEVERED REPLACEMENT BOND OPTION TO WAIT | STEIN indiffEPS EBIT LEASE SLM | GOLF IRR MACRS ... Đ : 1 ►