Unilate Textiles is evaluating a new product, a silk/wool blended fabric. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new project. Make sure all work is shown.
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Module Three: Integrative Problem
Unilate Textiles is evaluating a new product, a silk/wool blended fabric. Assume that you were recently
hired as assistant to the director of capital budgeting, and you must evaluate the new project.
The fabric would be produced in an unused building adjacent to Unilates Southern Pines, North
Carolina plant. Unilate owns the building, which is fully depreciated. The required equipment would cost
$200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by
$25,000, while accounts payable would go up by $5,000. All of these costs would be incurred at Year 0.
By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. (See
Table 10A.2 at the end of Chapter 10 for MACRS recovery allowance percentages.)
The project is expected to operate for four years, at which time it will be terminated. The cash
inflows are assumed to begin one year after the project is undertaken, or at t = 1, and to continue out to
t = 4. At the end of the projects life (Year 4), the equipment is expected to have a salvage value of
Unit sales are expected to total 100,000 five-yard textile rolls per year, and the expected sales price
is $2 per roll. Cash operating costs for the project (total operating costs less depreciation) are expected
to total 60% of dollar sales. Unilates marginal tax rate is 40%, and its required rate of return is 10%.
Tentatively, the silk/wool blend fabric project is assumed to be of equal risk to Unilates other assets.
You have been asked to evaluate the project and to make a recommendation as to whether it
should be accepted or rejected. To guide you in your analysis, your boss gave you the following set of
tasks to complete:
Unilate uses debt in its capital structure, so some of the money used to finance the project will be
debt. Given this fact, should the projected cash flows be revised to show projected interest
b. If this project had been a replacement project rather than an expansion project, how would the
analysis have changed? No calculations are needed; just think about the changes that would have to
occur in the cash flow table.
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