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

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Chapter 11 Mini CaseSituationAnalysis of New Expansion ProjectSuppose the firm had spent $100,000 last year to rehabilitate the production line site.Should tincluded 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.Shouincluded 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 linesper year.Should this be considered in the analysis?If so, how?Answer:See Chapter 11 Mini CaseShrieves Casting Company is considering adding a new line to its product mix, and the capital budgeanalysis is being conducted by Sidney Johnson, a recently graduated MBA.The production line woulup 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 insequipment.The machinery has an economic life of 4 years, and Shrieves has obtained a special tax rplaces the equipment in the MACRS 3-year class.The machinery is expected to have a salvage valueafter 4 years of use.The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental coper unit in the first year, excluding depreciation.Each unit can be sold for $200 in the first year.The sand cost are expected to increase by 3% per year due to inflation.Further, to handle the new line, theworking capital would have to increase by an amount equal to 12% of sales revenues.The firm’s tax rand 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?AnsweChapter 11 Mini Case Show(2.)Suppose the firm had spent $100,000 last year to rehabilitate the production line site.Should tincluded 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.Shouincluded 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 linesper year.Should this be considered in the analysis?If so, how?Answer:See Chapter 11 Mini Case
NWC/Sales12%
Inflation rate3%Annual Depreciation ExpenseDepreciable Basis = Equipment + Freight + InstallationDepreciable Basis =$240,000Year%xBasis=Depr.10.3333$240,000$79,992$160,00820.4445240,000106,68053,32830.1481240,00035,54417,78440.0741240,00017,7840d.Construct annual incremental operating cash flow statements.

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Term
Spring
Professor
Murtagh
Tags
Depreciation, cash flow

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