Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year. Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues. To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

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Answer 1

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Prompt: Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the 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 Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. 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 1,000 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…

Scottech is examining an investment opportunity that will involve buying $120,000 worth of equipment. They will need $10,000 in net working capital up front. Shipping will cost $5,000 and installation will cost $10,000. The firm paid a management consultant $4,000 to analyze this project, which is supposed to increase sales by $20,000 per year. If the firm accepts the project, they will have to spend $3,500 to train the employees to use the new equipment. The corporate tax rate is 21%. What is the initial outlay for the project? ($150,500) ($130,500) ($126,500) O ($148,500) O ($123,000)

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the 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 Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. 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 1,000 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,…

Answer 2

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Answer 3

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Answer 4

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Expert Solution & Answer

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Answer 5

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 6

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

Answer 7

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

Answer 8

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

Answer 9

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

Answer 10

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 11

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 12

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 13

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 14

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Answer 15

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Answer 16

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Answer 17

Ch. 13 - Define each of the following terms: Project cash...Ch. 13 - Prob. 2Q Ch. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4Q Ch. 13 - Prob. 5Q Ch. 13 - Prob. 6Q Ch. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8Q Ch. 13 - Prob. 9Q Ch. 13 - Distinguish among beta (or market) risk,...

Solution Summary: The author explains that Incremental Cash flow is the cash flow of the business with the project minus the company's cash flows, and if it is a deferred (sunk) cost, it should not be

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To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Chapter 13 Solutions