11 Case model - 11 Case model 3/22/2010 7:09 2/17/2006...

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11 Case model 3/22/2010 7:09 2/17/2006 Chapter 11. The Basics of Capital Budgeting Assume that you recently went to work for Allied Components Company, a supplier of auto repair part after-market with products from Daimler Chrysler, Ford, and other auto makers. Your boss, the chief fi officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L invol new item to the firm’s ignition system line; it would take some time to build up the market for this prod cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash fl decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely n after 3 years. Here are the projects' cash flows (in thousands of dollars): Year 0 ($100) ($100) 1 $10 $70 2 $60 $50 3 $80 $20 Depreciation, salvage values, net operating working capital requirements, and tax effects are all includ cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must now de whether one or both of the projects should be accepted. PART C
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11 Case model - 11 Case model 3/22/2010 7:09 2/17/2006...

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