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ACC00716: Finance - Shrieves Casting Company Case Study Assessment Answer
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Internal Code: 1AHEAD
Code: ACC00716
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. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm would have to increase would need to make an upfront investment in networking capital equal to 12% of the first year’s sales revenues. This investment would be recovered at the end of the project (year 4). The firm’s tax rate is 40%, and its weighted average cost of capital is 10%. ACC00716
Finance Assessment Answer
Assignment Task: ACC00716 1. Shrieves Casting Company is considering adding a new line to its product mix, and Sidney Johnson, a recently graduated MBA, is conducting the 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 the annual depreciation for taxation purposes is shown in the table below. The machinery is expected to have a salvage value of $25,000 after 4 years of use. ACC00716
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. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm would have to increase would need to make an upfront investment in networking capital equal to 12% of the first year’s sales revenues. This investment would be recovered at the end of the project (year 4). The firm’s tax rate is 40%, and its weighted average cost of capital is 10%. ACC00716
- Suppose the firm spent $100,000 last year to repair the production line site. Should this be included in the project analysis?
- What is the upfront cash flow (year 0) for the machinery?
- Calculate the annual sales revenues and costs (other than depreciation).
- Calculate net income for each year of the project.
- Calculate the after-tax salvage value. ACC00716
- Estimate the cash flow due to investments in net working capital.
- Calculate the net cash flows for each year and the project’s NPV.
- Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be included in the analysis? If so, how?
- Assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 per year. Should this be considered in the analysis? If so, how? ACC00716
- What is each project’s initial NPV without replication?
- What is each project’s equivalent annual annuity?
- Apply the replacement chain approach to determine the projects’ extended NPVs. Which project should be chosen?
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