Shrek Casting Company is considering adding a new line to its product mix. The production line would be set up in unused

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Shrek Casting Company is considering adding a new line to its
product mix. The production line would be set up in unused space in
Shrek's' 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 would
be a class 8 with a 20% CCA rate. The machinery is expected to have
a salvage value of $20,000 after 4 years of use.
The new line would generate incremental sales of 1,300 units per
year for four years at an incremental cost of $125 per unit in the
first year, excluding depreciation. Each unit can be sold for $225
in the first year. The sales price and cost are expected to
increase by 3% per year due to inflation. Further, to handle the
new line, the firm’s net operating working capital would have to
increase by an amount of $37,000. The firm’s tax rate is 31%, and
its overall weighted average cost of capital is 10 percent.
A. Initial Outlay (in 1000s)

Shrek Casting Company Is Considering Adding A New Line To Its Product Mix The Production Line Would Be Set Up In Unused 1 (90.04 KiB) Viewed 38 times

1 2 3 4 B. Operating Cash Flows (in 1000s) Yrs Intial Outlay # Units 1,300.000 0.225 1,300.000 0.232 1,300.000 1,300.000 0.239 0.246 Price Costs 0.125 0.129 0.133 0.137 NCF-BT 130.000 Tax 40.300 NCF-AT PV of Operating CF's 89.700 $81.545 20.00 C. Ending Cash Flows Salvage Value NOWC Recovery NCFs PV of Salv + NOWC 37.00 $0.00

D. NPV of CCA Tax Shield C = Cost 240.00 S= Salv Value d= CCA rate= T= r= cost of capital = n= PV of CCATS= #DIV/0! NPV = Investment Outlay + PV Project CF + PV CCATS + PV Ending CF Investment Outlay $ (277.00) PV of Operating CF PV CCATS PV Ending CF NPV of project $ (277.00) PROJECT Decision: ACCEPT / REJECT