A colleague of yours is planning to start a small, plastic components manufacturing business. He has invited you to be a partner. Best estimates for the total depreciable capital for equipment which includes a compounder and extruder is $500,000. Expected sales amount to $250,000 annually and total manufacturing costs without depreciation was estimated to be about $96,500 yearly. If equipment can be purchased and installed in one year and the project has a ten year life, perform a complete discounted cash flow analysis and make a decision if you should invest or not. Assume straight-line depreciation for ten years at which point the equipment salvage value will be zero. Also assume that uou can invest at 10% interest in other opportunitites for comparison.

A colleague of yours is planning to start a small, plastic components manufacturing business. He has invited you to be a partner. Best estimates for the total depreciable capital for equipment which includes a compounder and extruder is $500,000. Expected sales amount to $250,000 annually and total manufacturing costs without depreciation was estimated to be about $96,500 yearly. If equipment can be purchased and installed in one year and the project has a ten year life, perform a complete discounted cash flow analysis and make a decision if you should invest or not. Assume straight-line depreciation for ten years at which point the equipment salvage value will be zero. Also assume that uou can invest at 10% interest in other opportunitites for comparison.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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