short-run and long-run coordination Retum to Ralph's LP, problem 12 in Chapter 14. There you detennined an optimal short-run production plan, given a set of LLAs. Here Ralph is eontemplating expansion of the fabrieation department, increasing its eapacity from 300 to 450 units

(scaled in direet labor hours).

a] Assume all LLAs in the originai setting eontinue to hold and that variable costs are eash expenditures. Determine the ineremental eash flow from operations that would follow from such an expansion.

b] Thinking about this some more, Ralph concludes this increased aetivity will reshape the cost strueture in the manufaeturing service group. Automation will result in an LLA of MS = 12,000, an entirely fixed eost. Assuming all of the service group eosts (both with and without expansion) are cash expenditures, detennine the ineremental cash flow from operations associated with the proposed expansion.

e] Ralph anticipates the economic strueture in [b] above willlast for 3 years. For modeling purposes of this sort, Ralph treats all eash flow as occurring at the end of the respective period. Ralph's marginai tax rate is 40%, and positive taxabIe ineome from other sources will be present if any of the periods result in a negative tax ineome. The expansion will cost 30,000 (an immediate outlay). For tax purposes, MACRS will be used (requiring depreciation of 33.33%, 44.45%, 14.81% and 7.41% over a 4-year horizon). No salvage value or eosts are anticipated.

In addition, some minor plant modifieation and work force training will be required. Ralph estimates this will result in an expenditure of 5,000. This will oceur at the start of the project (when the investment outlay is made), and will be expensed for tax purposes at the end of the first year.

Determine whether this is an attraetive expansion proposal. Assume a 9% cost of capital.

d] Finally, briefly speeulate on how risk, learning, competition, and teehnology ehange might affeet your analysis.

AppendixLO1