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
explain key assumptions of Baumol cash management model

A? The effect of incorrect recognition of revenue on financial reportssk question #Minimum 100 words accepted#

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

considering floatation on the stock exchange, produce a report explaining advantage of such a move

Explain about the Commission Broker All brokers sell and buy securities for earning a commission. From the investor's point of view, he is the most significant member of the


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

i need a assignment on uk company to be submitted in my college how can u help

Question: The District Cash Offices represents the decentralisation of services provided by the Accountant - General Department, specially in the collection and accounting of r