Assignment -
Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves' main plant. The machinery's invoice price would be approximately $260,000, and it would cost an additional $40,000 to install the equipment. The machinery has an economic life of 5 years, and machine equipment would be depreciated over 5-year using straight line basis depreciation. The machinery is expected to have a salvage value after tax of $33,000 after 5 years of use.
The new line would generate incremental sales of 1,250 units per year for 5 years at an incremental cost of $100 per unit. Each unit can be sold for $150. Further, to handle the new line, the firm's net working capital would have an amount equal to 12% of sales revenues. The firm's tax rate is 35%, and its overall weighted average cost of capital is 10%.
Calculate the net cash flows for each year. Based on these cash flows, what are the project's NPV, IRR, and payback. Do these indicators suggest the project should be undertaken?