Reference no: EM133011507

Question - Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis conducting by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space ins Shrieves' 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 and additional €30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACR 3-year class. The machinery is expected to have a salvage value of €25,000 after 4 years of use. The new line would generate incremental sales of 1,250 per unit 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 the cost are both expected to increase by 3 per cent per yar due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12 per cent of sales revenues. The firm's net working capital would have to increase by an amount equal 12 per cent of sales revenues. The firm's tax rate is 40 per cent, and its overall WACC is 10 per cent.

Required - Calculate the net cash flow for each year. Based on these cash flows, what are the project's NPV, IRR, MIRR, PI, payback and discounted payback? Do these indicators suggest that the project should be undertaken?