Scribd Logo
Unggah

Selamat datang di Scribd!

  • IOW Casting Company Capital Budgeting Word Solution

    Diunggah oleh

    alka murarka
    449 tayangan2 halaman
    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each 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 firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. 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 the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

    Hak Cipta

    © © All Rights Reserved

    Apakah menurut Anda dokumen ini bermanfaat?

    Apakah konten ini tidak pantas?

    Laporkan Dokumen Ini
    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each 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 firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. 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 the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

    Hak Cipta:

    © All Rights Reserved
    Tandai sebagai konten tidak pantas
    449 tayangan2 halaman

    IOW Casting Company Capital Budgeting Word Solution

    Diunggah oleh

    alka murarka
    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each 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 firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. 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 the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

    Hak Cipta:

    © All Rights Reserved
    Tandai sebagai konten tidak pantas
    dari 2

    ADD YOUR COLLEGE NAME

    IOW
    Capital Budgeting Analysis
    ADD YOUR NAME
    [Pick the date]

    For full set of answer, Please mail me at alkamurarkaa@gmail.com


    Also for any other projects help please mail me. I can help in any courses Finance, Management,
    Strategy, Marketing, Human Resources, Organization Behavior, Economics, Excel, Dissertation, CAPSIM,
    Online Test and any other kind of projects.

    [Type the abstract of the document here. The abstract is typically a short summary of the contents of
    the document. Type the abstract of the document here. The abstract is typically a short summary of the
    contents of the document.]
    1. Calculate and provide the annual sales revenues and costs (other than depreciation). Why
    is it important to include inflation when estimating cash flows?

    2. Construct 4 years of annual incremental operating cash flow statements for IOW Casting
    Company. Estimate the required net working capital for each year, and the cash flow due
    to investments in net working capital. Calculate the after-tax salvage cash flow.

    3. Calculate the net cash flows for each of the 4 years. Based on these cash flows, what are
    the project’s NPV, IRR, MIRR, PI, payback, and discounted payback? Do these
    indicators suggest the project should be undertaken? Explain.

    4. 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? Provide your
    rationale.

    5. Describes sensitivity analysis and discuss a) its primary weakness; and b) its primary
    usefulness? For the IOW project, perform a sensitivity analysis on the unit sales, salvage
    value, and cost of capital. Assume that each of these variables can vary from its expected,
    or “base-case” value by ± 10%, ± 20%, and ± 30%. Include a sensitivity diagram, and
    discuss the results.

    6. Assume that Sydney 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 could be only approximately 1,000 units a year and the unit price would be set
    at $150. Conversely, an excellent consumer response could produce sales of 2,000 units
    and a unit price of $220. 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 the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-
    case NPVs and probabilities of occurrence to find the project’s expected NPV, standard
    deviation, and coefficient of variation.

    7. Explain scenario analysis and any problems, issues, or concerns that surround this type of
    projection.

    8. Define simulation analysis, and discuss its principal advantages and disadvantages.

    9. Assume that IOW’s average project has a coefficient of variation in the range of 0.2 to
    0.4. Would the new product line be classified as high risk, average risk, or low risk?
    What type of risk is being measured here?

    10. IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust
    for risk. Given this consideration, should the new line be accepted? Explain.

    11. Describe other subjective risk factors that should be considered before the final decision
    is made, and their individual impact on the project.

    Anda mungkin juga menyukai