Calculate the net cash flows for each year

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Reference no: EM131881418

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 $200,000, and it would cost an additional $40,000 to install the equipment. The machinery has an economic life of 4 years, and machine equipment would be depreciated over 4-year using straight line basis depreciation. The machinery is expected to have a salvage value after tax of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit. Each unit can be sold for $200. 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 40%, 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?

Reference no: EM131881418

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