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FM Case1 - Capital Budgeting Techniques Questions

FM Case1 - Capital Budgeting Techniques Questions - Capital...

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Capital Budgeting Integrated Case Allied Components Company You recently went to work for Allied Components Company, a supplier of auto repair  parts used in the after-market with products from DaimlerChrysler, Ford, and other  auto makers. Your boss, the chief financial officer (CFO), has just handed you the  estimated cash flows for two proposed projects. Project L involves adding a new  item to the firm’s ignition system line; it would take some time to build up the market  for this product, so the cash inflows would increase over time. Project S involves an  add-on to an existing line, and its cash flows would decrease over time. Both  projects have 3-year lives, because Allied is planning to introduce entirely new  models after 3 years. Here are the projects’ net cash flows (in thousands of dollars): 0 1 2 3 | | | | Project L -100 10 60 80 Project S -100 70 50 20 Depreciation, salvage values, net operating working capital requirements, and tax  effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he  concluded that both projects have risk characteristics that are similar to the firm’s  Capital Budgeting Case Integrated Case 1
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average project.  Allied’s WACC is 10%.  You must now determine whether one or  both of the projects should be accepted.
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