Ch11 Mini Case - Chapter 11 Mini Case Situation Shrieves...

Chapter 11 Mini Case
Situation
Analysis of New Expansion Project
Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should t
included in the analysis? Explain. Answer: See Chapter 11 Mini Case Show
(3.) Now assume that the plant space could be leased out to another firm at $25,000 per year. Shou
included in the analysis? If so, how? Answer: See Chapter 11 Mini Case Show
(4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines
per year. Should this be considered in the analysis? If so, how? Answer: See Chapter 11 Mini Case
Shrieves Casting Company is considering adding a new line to its product mix, and the capital budge
analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line woul
up in unused space in Shrieves' main plant. The machinery’s invoice price would be approximately $
another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to ins
equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax r
places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value
after 4 years of use.
The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental co
per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The s
and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the
working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax r
and its overall weighted average cost of capital is 10%.
a. Define “incremental cash flow.” Answer: See Chapter 11 Mini Case Show
(1.) Should you subtract interest expense or dividends when calculating project cash flow? Answe
Chapter 11 Mini Case Show
(2.) Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should t
included in the analysis? Explain. Answer: See Chapter 11 Mini Case Show
(3.) Now assume that the plant space could be leased out to another firm at $25,000 per year. Shou
included in the analysis? If so, how? Answer: See Chapter 11 Mini Case Show
(4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines
per year. Should this be considered in the analysis? If so, how? Answer: See Chapter 11 Mini Case
NWC/Sales 12%

Inflation rate 3%
Annual Depreciation Expense
Depreciable Basis = Equipment + Freight + Installation
Depreciable Basis = $240,000
Year % x Basis = Depr.
1 0.3333 $240,000 $79,992 $160,008
2 0.4445 240,000 106,680 53,328
3 0.1481 240,000 35,544 17,784
4 0.0741 240,000 17,784 0
d. Construct annual incremental operating cash flow statements.