a. Disregard the assumptions. What is Shrieves' depreciable basis? What are the annual depreciation expenses?

b. Construct annual incremental operating cash flow statements.

c. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital.

d. Calculate the after-tax salvage cash flow.

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

f. What does the term "risk" mean in the context of capital budgeting; to what extent can risk be quantified; and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?

g. Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume that each of these variables can vary from its base-case, or expected, value by plus and minus 10%, 20%, and 30%. Include a sensitivity diagram, and discuss the results.

h. Assume that Sidney Johnson is confident of her estimates of all the variables that affect the project's cash flows except unit sales and sales price: If product acceptance is poor, unit sales would be only 900 units a year and the unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of $240. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).

What is scenario analysis? What is the worst-case NPV? The best-case NPV? Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation.

i. Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk. Should the new line be accepted?

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, another $10,000 in shipping charges would be required, and it would cost an 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 MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.