Capital Budgeting, Corporate Finance

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated from the School of Administrative Studies at York University and works for Oxford as an analyst. On Thursday, his manager asked him to evaluate the two new product lines and needs the recommendation by next Monday. Necessary equipment for the production line AME will cost $10 million, including installation costs. Product line AME will also require an initial investment of $3million in net working capital. Product line AME will generate pre-tax revenues that are $5.6 million for the first year. Then the pre-tax revenue will grow at an annual rate of 2 percent for the next 14 years. A new technology will replace the product AME after that. The pre-tax operating costs will be $2.2 million/year for the first 10 years, then $3.3 million/year for the next 5 years. The salvage value of AME will be $0.39 million at the end of year 15.

New equipment and installation costs for product line CGK will be $ 7 million and the initial working capital requirement will also be $3million. Production line CGK will generate pre-tax revenues that are $4.8 million for the first year. Then the pre-tax revenue will then increase at an annual rate of 3 percent for the next 14 years. A new model is in R&D process and will replace the CGK after that. The pre-tax operating costs will be $2.5 million/year for the first year and then grow at an annual rate of 2 percent for the next 14 years. The salvage value of CGK will be $0.27 million at the end of year 15.

The initial equipment purchase falls into a CCA Asset Class 8 at a rate of 20 percent, regardless of which alternative is chosen. Oxford''''s corporate tax rate is 40 percent and its rate of required return on such investments is 12 percent. Assume the initial working capital investment will be made at the time of the purchase the equipment for either product line. For simplicity, all cash flows for a given year occur at the end of the year.

If you were Eric, which new product line would you recommend on the basis of NPV and IRR?
Posted Date: 2/26/2013 12:40:45 PM | Location : Canada







Related Discussions:- Capital Budgeting, Assignment Help, Ask Question on Capital Budgeting, Get Answer, Expert's Help, Capital Budgeting Discussions

Write discussion on Capital Budgeting
Your posts are moderated
Related Questions
What do you think the future has in store in terms of white collar crime?Are there certain kinds of white collar crime discussed in this text that you believe will increase?Are the

Problem (a) The yields to maturity on five zero-coupon bonds are given below:                    Years to Maturity                 Yield (%)

You are required to provide an essay or report of approx 500 words or less (excluding attachments and references),  accompanied by relevant calculations, in MS Word orPDF format ac

An original United States silver dollar from the late 1800s consists of about 24 grains of silver.  Suppose that at current prices, the silver content of this coin is worth $2.25.

Determine current stock price: 1) IBM issued 10-year bonds with a par value of $1,000 and a coupon rate of 10%, paid semiannually. The yield to maturity on this bond is 12%.

Problem: "It is simply not really the company's choice who is and is not a stakeholder" (a) Evaluate the above statement in the context of Civil Society Organisations as st

Question: (a) Distinguish between open-ended funds and closed-ended funds. (b) Briefly explain the differences between fundamental analysis and technical analysis. (c)

Question 1: Compare and contrast the Capital Asset Pricing Model with that of the Arbitrage Pricing Theory. Question 2: (a) Explain the concept of stock market efficien

On December 31, 2009, the Real Weapons Factory reported total stockholders' equity of $447,200. On that date, total contributed capital was $360,000. During 2009, the firm had tota

Summarize the key statistics for the stock and the industry (choose 8 items you believe informative, such as P/E ratio, market capitalization, dividend yield, ROE, sales etc.tion..