1. Explain the proposed investment at Merseyside Works. What are the expected advantages that the investment would bring to the company?
2. Discuss the concept of cannibalization as it relates to Merseyside and Rotterdam. Should cannibalization affect the cash flows for the Merseyside Project? Explain.
3. Go to lines 4 and 5 in exhibit 2. Should (1) overhead and (2) preliminary engineering costs be included in the calculation of the cash flows for the Merseyside Project? Why or why not? Explain.
4. The Treasury Staff believes the long term inflation rate will be 3% per year. However, the assumption in exhibit 2 is that inflation is 0%. Explain how inflation should be reflected in the sales figures used in the cash flow calculations.
5. Examine the 4 criteria used on page 354 to evaluate the capital expenditure proposals. Offer a critique of each of the 4 techniques. Which criteria should be used and which are not helpful?
Explain your reasons