Shrek Casting Company is considering adding a new line to its product mix. The production line would be set up in unused space in Shrek's' main plant. The machinerys 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 would be a class 8 with a 20% CCA rate. The machinery is expected to have a salvage value of $20,000 after 4 years of use.

The new line would generate incremental sales of 1,300 units per year for four years at an incremental cost of $125 per unit in the first year, excluding depreciation. Each unit can be sold for $225 in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firms net operating working capital would have to increase by an amount of $37,000. The firms tax rate is 31%, and its overall weighted average cost of capital is 10 percent.

r =	10%
T =	31%
d = CCA rate =	20%
Machine Cost =	200,000
Shipping Cost =	10,000
Installation cost =	30,000
Change in NOWC =	37,000
# Units =	1,300
Price =	225
Costs =	125
Inflation =	3%
Salvage Value =	20,000
Economic life =	4.00	years

A. Initial Outlay (in 1000s)
New Machine Cost	200.00
Plus: Setup & Training	40.00
Capital Cost	240.00
Change in NOWC	37.00
Initial Investment CF	277.00

1 2 3 4 B. Operating Cash Flows (in 1000s) Yrs Intial Outlay # Units 1,300.000 0.225 1,300.000 0.232 1,300.000 1,300.000 0.239 0.246 Price Costs 0.125 0.129 0.133 0.137 NCF-BT 130.000 Tax 40.300 NCF-AT PV of Operating CF's 89.700 $81.545 20.00 C. Ending Cash Flows Salvage Value NOWC Recovery NCFs PV of Salv + NOWC 37.00 $0.00 D. NPV of CCA Tax Shield C = Cost 240.00 S= Salv Value d= CCA rate= T= r= cost of capital = n= PV of CCATS= #DIV/0! NPV = Investment Outlay + PV Project CF + PV CCATS + PV Ending CF Investment Outlay $ (277.00) PV of Operating CF PV CCATS PV Ending CF NPV of project $ (277.00) PROJECT Decision: ACCEPT / REJECT 1 2 3 4 B. Operating Cash Flows (in 1000s) Yrs Intial Outlay # Units 1,300.000 0.225 1,300.000 0.232 1,300.000 1,300.000 0.239 0.246 Price Costs 0.125 0.129 0.133 0.137 NCF-BT 130.000 Tax 40.300 NCF-AT PV of Operating CF's 89.700 $81.545 20.00 C. Ending Cash Flows Salvage Value NOWC Recovery NCFs PV of Salv + NOWC 37.00 $0.00 D. NPV of CCA Tax Shield C = Cost 240.00 S= Salv Value d= CCA rate= T= r= cost of capital = n= PV of CCATS= #DIV/0! NPV = Investment Outlay + PV Project CF + PV CCATS + PV Ending CF Investment Outlay $ (277.00) PV of Operating CF PV CCATS PV Ending CF NPV of project $ (277.00) PROJECT Decision: ACCEPT / REJECT