Engineered Supplies Inc. has over the past two years been been seriously consideing whether to expand its manufacturing line (the "project"). The company is under pressure to increase its size in order to meet the growth aspirations ofits shareholders.The following information is provided: $000s 1 Estimated start of project Immediate 2 Cost of new line, including installation - payable 50% at beginning of project and balance at end of year 1 3 Start up of production 4 Esitimated EBIT of new line per year 750,000 Start of Year 2 200,000 5 Cost of feasibilty study for this new line which was paid during this past year whilst considering investment 500 6 Tax and accounting depreciation will be straight line over 12 years with no salvage valuein the calculation 7 Estimated disposal value for this line from a potential buyer seeking it after 10 years of use. The company feels that it will most likely sell the line after 10 years of use. 90,000 Estimated raw material & finished goods inventory for this line is $20,000. This will remain stable at this level each year until & including year 4 of its useful life. With effect from year 5, the raw materials & finished goods inventory needed for the new line will total $28,000 and will remain at that level until the end of its useful life. 9 Estimated Accounts Receivable arising from sales will be constant over life of line 10 Estimated Accounts Payable arising from credit terms negotiated with suppliers over life of line 15,000 10,000 11 Tax rate for the company 35% 12 Thelineis estimated to reduce annual after tax cash flow for its existing lines by 5,000 13 The new line will use a particular raw material, amongst others, that has in the past been subject to dramatic swings in price. This particular component represents 20% of their total raw material cost. 14 The company has a weighted cost of capital of 10%. The new line represents a similar risk to the company's average risk. A Please advise the company on how you would recommend that they proceed. B Undertake a risk assessment for this project

Engineered Supplies Inc. has over the past two years been been seriously consideing whether to expand its manufacturing line (the "project"). The company is under pressure to increase its size in order to meet the growth aspirations ofits shareholders.The following information is provided: $000s 1 Estimated start of project Immediate 2 Cost of new line, including installation - payable 50% at beginning of project and balance at end of year 1 3 Start up of production 4 Esitimated EBIT of new line per year 750,000 Start of Year 2 200,000 5 Cost of feasibilty study for this new line which was paid during this past year whilst considering investment 500 6 Tax and accounting depreciation will be straight line over 12 years with no salvage valuein the calculation 7 Estimated disposal value for this line from a potential buyer seeking it after 10 years of use. The company feels that it will most likely sell the line after 10 years of use. 90,000 Estimated raw material & finished goods inventory for this line is $20,000. This will remain stable at this level each year until & including year 4 of its useful life. With effect from year 5, the raw materials & finished goods inventory needed for the new line will total $28,000 and will remain at that level until the end of its useful life. 9 Estimated Accounts Receivable arising from sales will be constant over life of line 10 Estimated Accounts Payable arising from credit terms negotiated with suppliers over life of line 15,000 10,000 11 Tax rate for the company 35% 12 Thelineis estimated to reduce annual after tax cash flow for its existing lines by 5,000 13 The new line will use a particular raw material, amongst others, that has in the past been subject to dramatic swings in price. This particular component represents 20% of their total raw material cost. 14 The company has a weighted cost of capital of 10%. The new line represents a similar risk to the company's average risk. A Please advise the company on how you would recommend that they proceed. B Undertake a risk assessment for this project

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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