Capital Budgeting, Suppose that Oxford Inc. is interested in the two new products, AME, Corporate Finance

Capital Budgeting, Corporate Finance

Assignment Help:

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated from the School of Administrative Studies at York University and works for Oxford as an analyst. On Thursday, his manager asked him to evaluate the two new product lines and needs the recommendation by next Monday. Necessary equipment for the production line AME will cost $10 million, including installation costs. Product line AME will also require an initial investment of $3million in net working capital. Product line AME will generate pre-tax revenues that are $5.6 million for the first year. Then the pre-tax revenue will grow at an annual rate of 2 percent for the next 14 years. A new technology will replace the product AME after that. The pre-tax operating costs will be $2.2 million/year for the first 10 years, then $3.3 million/year for the next 5 years. The salvage value of AME will be $0.39 million at the end of year 15.

New equipment and installation costs for product line CGK will be $ 7 million and the initial working capital requirement will also be $3million. Production line CGK will generate pre-tax revenues that are $4.8 million for the first year. Then the pre-tax revenue will then increase at an annual rate of 3 percent for the next 14 years. A new model is in R&D process and will replace the CGK after that. The pre-tax operating costs will be $2.5 million/year for the first year and then grow at an annual rate of 2 percent for the next 14 years. The salvage value of CGK will be $0.27 million at the end of year 15.

The initial equipment purchase falls into a CCA Asset Class 8 at a rate of 20 percent, regardless of which alternative is chosen. Oxford''''s corporate tax rate is 40 percent and its rate of required return on such investments is 12 percent. Assume the initial working capital investment will be made at the time of the purchase the equipment for either product line. For simplicity, all cash flows for a given year occur at the end of the year.

If you were Eric, which new product line would you recommend on the basis of NPV and IRR?

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

Capital Budgeting, Corporate Finance

Related Discussions:- Capital Budgeting

Commercial insurance example, The East Coast Conglomerate Co (ECCC) a small...

Sensitivity analysis, NPV calculation if we have Initial investment 60000,l...

Financial Ratios, I do not understand how ratios are calculated on MSN Mone...

Activity quota, A minimum level of sales-oriented activities that must be m...

Stress testing related to risk management in banking, Question: "Banks ...

Illustrate a stakeholder mapping matrix, Many strategic decisions fail be...

Cost of capital, How does cost of capital vary with debt-to-value ratio?

Risk aversion and the equity risk premium, Risk Aversion and the Equity Ris...

Characteristic of an efficient market, Question 1: (a) Explain and com...

#title.decision tool of npv, describe the primary decision tool-NPV

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT