Capital Budgeting Analysis

Question Description

Adams, Incorporated would like to add a new line of business to its existing retail business. The new line of business will be the manufacturing and distribution of animal feeds. This is a major capital project. Adams, Incorporated is aware you an in an MBA program and would like you to help analysis the viability of this major business venture based on the following information:

The production line would be set up in an empty lot the company owns.

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 useful life of 4 years, and it is a MACRS 3-year asset.

The machinery is expected to have a salvage value of $25,000 after 4 years of use.

This new line of business will generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due to inflation.

Net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 10%.

Required:

1. If the company spent $40,000 last year in the upkeep of the empty lot, should this cost be included in the analysis? Why or why not?

2. Disregard the assumptions in part 1 above. What is the machinery’s depreciable basis? What are the annual depreciation expenses?

3. Calculate the annual sales revenues and costs (other than depreciation).

4. Construct annual incremental operating cash flow statements.

5. Estimate the required net working capital for each year based on sales for the following year. Working capital will be recovered at the end of year 4.

6. Calculate the after-tax salvage cash flow.

7. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR, Profitability Index (PI), and payback?

8. Can you use the Payback method to decide whether this is a good project or not? Why or why not?

9. Interpret what NPV, IRR, and Profitability Index (PI) mean. Based on your interpretation, do these indicators suggest the new business line should be undertaken?

Please answer 1 to 9 questions reading the question



^{Have a similar assignment? "Place an order for your assignment and have exceptional work written by our team of experts, guaranteeing you A results."}

Our Service Charter

1. Professional & Expert Writers: Eminence Papers only hires the best. Our writers are specially selected and recruited, after which they undergo further training to perfect their skills for specialization purposes. Moreover, our writers are holders of masters and Ph.D. degrees. They have impressive academic records, besides being native English speakers.

2. Top Quality Papers: Our customers are always guaranteed of papers that exceed their expectations. All our writers have +5 years of experience. This implies that all papers are written by individuals who are experts in their fields. In addition, the quality team reviews all the papers before sending them to the customers.

3. Plagiarism-Free Papers: All papers provided by Eminence Papers are written from scratch. Appropriate referencing and citation of key information are followed. Plagiarism checkers are used by the Quality assurance team and our editors just to double-check that there are no instances of plagiarism.

4. Timely Delivery: Time wasted is equivalent to a failed dedication and commitment. Eminence Papers are known for the timely delivery of any pending customer orders. Customers are well informed of the progress of their papers to ensure they keep track of what the writer is providing before the final draft is sent for grading.

5. Affordable Prices: Our prices are fairly structured to fit in all groups. Any customer willing to place their assignments with us can do so at very affordable prices. In addition, our customers enjoy regular discounts and bonuses.

6. 24/7 Customer Support: At Eminence Papers, we have put in place a team of experts who answer all customer inquiries promptly. The best part is the ever-availability of the team. Customers can make inquiries anytime.