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B J Plastic Molding Company Solution PDF
B J Plastic Molding Company Solution PDF
Why Answer: The X2-A machine should be considered for purchase by the
company as
Q.2.What are some relevant pieces of information necessary for the decision
to purchase or not to purchase the machine?
Answer: The sale proceeds of the old machinery should have been
mentioned and also its book value, so that exact initial cash outflow could
have been calculated easily.
The income tax rate should also have been given, then the cash flow position
would have been different altogether.
As per the above calculation the X2-A machine is not economically feasible
for the company as it is giving a loss of Rs.24700
Q.4.Should the company purchase the machine? Why or why not? Answer:
Yes, the company should purchase the machine as it is going to benefit
the company in the long run because of its new technology and efficiency.
Q.5.If the company had a list of potential capital expenditure would the X2-
A likely to be on the list?
Answer: Yes, the X2-A would likely to be on the list if the company had to
make capital expenditure because the company urgently needs such capital
expenditure in order to meet its future needs.
Q.7.What part does the capital structure play in the capital budgeting
process?
Answer: Capital structure plays a very vital role in the capital budgeting
process as the company mainly raises the required capital from the two parts
of Capital Structure namely Debt and Equity.
Equity is that portion of capital which is raised by issuing shares and upon
which the company has to bear a cost of equity in the form of
return/dividend on investment for the shareholders
Q.8.Cite as many steps as you can of the capital budgeting process in the
typical manufacturing firm. Would the process differ significantly for
nonmanufacturing firm?
Answer: Capital budgeting steps for manufacturing firm are as follows:
1. Identify the investments project that agree with the organization’s strategy.
2. Gather information from all parts of the value chain to evaluate the
alternate projects
Q.9.What is the economic rationale for the use of NPV or IRR in capital
budgeting?
Answer: Both IRR and NPV account for the Time Value of Money in their
calculations. This is the economic rationale for the use of NPV and IRR in
the capital budgeting.
Answer: NPV is preferable over IRR because it can handle various discount
rates the long term projects unlike the IRR which uses fixed discount rates
for evaluating the projects.
NPV takes into account the marketing conditions when we are evaluating the
long term projects and the IRR does not.
NPV is more suitable than IRR when we are faced with the mix of cash
flows .i.e. both positive and negative cash flows.