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Shrieves Casting Company is considering adding a new line to its product mix, and the capital...

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Finance

Shrieves Casting Company is considering adding a new line to itsproduct mix, and the capital budgeting analysis is being conductedby Sidney Johnson, a recently graduated MBA. The cost of newmachinery for the new product line would be $644,000. The machineryhas economic life of eight years, and has no salvage value. Assumethat depreciation is straight-line to zero over the life of themachine. The new line would generate incremental sales of 70,000units per year at variable cost per unit of $21 and fixed cost of$725,000 per year. Each unit can be sold for $37 in the first year.The sale price and cost are both expected to remain the same. Thefirm’s tax rate is 35 percent, and the rate of return required forthis type of investment is 15 percent. . . What is the sensitivityof NPV to changes in the sales quantity? What is the effect on NPVof a 500-unit decrease in projected sales.

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