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 business school graduate. The production line would be set up in unused space in Shrieves' 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 $25,000 after 4 years of use The new line would generate incremental sales of 1,250 units per year for four 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 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 $32,000. The firms tax rate is 28%, and its overall weighted average cost of capital is 10 percent I. Utilize the Components Cash Flows Approach to analyze Shrieves new product project r = 10% T = 28% A. Initial Outlay (in 1000s) New Machine Cost 200.00 Plus: Setup & Training 40.00 Total Initial Outlay 240.00 Change in NWC 32.00 Initial Outlay CF 272.00 B. Operating Cash Flows (in 1000s) Yrs 1 2 3 4 Intial Outlay # Units 900.000 900.000 900.000 900.000 Price 0.160 0.165 0.170 0.175 Costs 0.100 0.103 0.106 0.109 NCF-BT 54.000 55.620 57.289 59.007 Tax 15.120 15.574 16.041 16.522 NCF-AT 38.880 40.046 41.248 42.485 PV of Operating CF's $128.450 C. Ending Cash Flows Salvage Value 25.00 NOWC Recovery 32.00 NCFs 57.00 PV of Salv + NOWC $38.93 D. NPV of CCA Tax Shield C = Cost 240.00 S= Salv Value 25 d= CCA rate= 20% T = 28% r= cost of capital = 10% n= 4 PV of CCATS= 39.576 NPV = Investment Outlay + PV Project CF + PV CCATS + PV Ending CF Investment Outlay $ (272.00) PV of Operating CF 128.45 PV CCATS 39.58 PV Ending CF 38.93 NPV of project $ (65.04)