Student Version IFM9 Ch 13 Mini CaseZH

Student Version IFM9 Ch 13 Mini CaseZH - 4/6/2006 Chapter...

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4/6/2006 Chapter 13 Mini Case Situation The new line would generate incremental sales of 1,250 units per year for four years at an incremental cost of $1 a. Define “incremental cash flow.” The change in the firm's total cash flow that occurs as a direct result of accepting the project. (1.) Should you subtract interest expense or dividends when calculating project cash flow? No (2.) Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should this be inclu No, the $100,000 rehabilitation to the production line was a sunk cost which has already occurred (3.) Now assume that the plant space could be leased out to another firm at $25,000 a year. Should this be inc Yes, this is considered an opportunity cost. (4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 Yes, cannibalization should be considered. Analysis of New Expansion Project Part I: Input Data Equipment cost $200,000 Shipping charge $10,000 Installation charge $30,000 Economic Life 4 Salvage Value $25,000 Tax Rate 40% Cost of Capital 10% Units Sold 1250 Sales Price Per Unit $200 Incremental Cost Per Unit $100 Inventory/sales 12% 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 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 Shrieves has obtained a special tax ruling which 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.
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Inflation rate 3% b. Disregard the assumptions in Part a. What is Shrieves' depreciable basis? What are the annual depreciatio Depreciable Basis = $240,000 ($200,000+$10,000+$30,000) Annual depreciation expenses = Annual Depreciation Expense Depreciable Basis = Equipment + freight + installation Depreciable Basis = Year % x Basis = Depr. 1 0.33 $0 $0 2 0.45 $0 $0 3 0.15 $0 $0 4 0.07 $0 $0 c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include infla d. Construct annual incremental operating cash flow statements. Annual Operating Cash Flows Year 1 Year 2 Year 3 Year 4 Units 1250 1250 1250 1250 Unit price Unit cost Sales Costs Depreciation Operating income before taxes (EBIT) Taxes (40%) Net operating profit after taxes Depreciation Net Operating CF e. Estimate the required net operating working capital for each year, and the cash flow due to investments in n Annual Cash Flows due to Investments in Net Operating Working Capital
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Student Version IFM9 Ch 13 Mini CaseZH - 4/6/2006 Chapter...

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