Customer Service Chat
Get quote & make Payment
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
Ask an Expert
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
Write your message here..
Assignment, Hi, I would like someone to accomplish my corporate finance pap...
Hi, I would like someone to accomplish my corporate finance paper Objectives o To understand the financial profile of the selected company. o To project future cash flows of the co
Market-adjusted and two-factor models - event study, Market-Adjusted and Tw...
Market-Adjusted and Two-Factor Models - Event Study As mentioned previously, you can use several alternative models to calculate a security's expected return. The market-adjus
A-note, A-Note is the highest tranche of an asset backed security or anothe...
A-Note is the highest tranche of an asset backed security or another structured financial product. An A-note is superior to other notes, like B-notes in bankruptcy or other credit
Determinants of growth of a company in financial terms, Determinants of gro...
Determinants of growth - Profit Margin Dividend Policy Financial Policy Total asset Turnover
Banks, discuss in detail various sources ffom wherebabks can borrow funds w...
discuss in detail various sources ffom wherebabks can borrow funds within India
Calculate the cost of equity capital, Question: (a) As the cost of capi...
Question: (a) As the cost of capital is an essential element of investment appraisal, its calculation must be undertaken with care. Failure to do so could lead to adverse cons
Mncs do increase their risk by borrowing foreign currencies, According to t...
According to those who are in favor of borrowing, the MNCs can achieve lower financing costs and hence their competing ability is improved. But according to the international fishe
Sensitivity analysis, NPV calculation if we have Initial investment 60000,l...
NPV calculation if we have Initial investment 60000,life is 3 year, net working capital is 15000, sale is 75000 per year, variable cost is 1000 per year, fixed cost is 5000 per yea
What risks do the finance house and bank face, Question : a) What are ...
Question : a) What are the rationales for interest and currency swaps? b) A finance house and a bank each have a $1billion balance sheet. The finance house has lent out at
Forecasting demand for single-period, In the apparel industry, three promin...
In the apparel industry, three prominent developments contribute to the complexity of forecasting: shortening product life-cycles, increasing product variety, and globalization of
Accounting Assignment Help
Economics Assignment Help
Finance Assignment Help
Statistics Assignment Help
Physics Assignment Help
Chemistry Assignment Help
Math Assignment Help
Biology Assignment Help
English Assignment Help
Management Assignment Help
Engineering Assignment Help
Programming Assignment Help
Computer Science Assignment Help
IT Courses and Help
Why Us ?
~24x7 hrs Support
~Quality of Work
~Time on Delivery
~Privacy of Work
Human Resource Management
Literature Review Writing Help
Follow Us |
T & C
Copyright by ExpertsMind IT Educational Pvt. Ltd.