1. The Zuber Bottle Company manufactures bottles for beer producers. Its current production capacity is 20 million bottles per year, which matches its current sales. The company, though, expects sales to increase to 22 million next year. Further, a market research company they hired has estimated that with an annual $1 million advertising and promotion campaign conducted over the next three years( that could be launched one year from the present), their sales could reach 24million next year, 26 million the year after, and then 29 million per year for the foreseeable future.

To meet potential demand, Zuber is considering a capital expansion project. The expansion project consists of the following:

$4,000,000 equipment cost

Zero capitalized installation cost

$500,000 expensed cost

Capitalized expenses would be depreciated over 10 years to a book value of zero.

$100,000 change in working capital

The facility is expected to produce for 10 years.

Salvage value minus removal cost equal zero.

Price of Zuber bottle$0.612/bottle

AVC of Zuber bottle is $0.387/bottle

Operating profit margin = m = P-AVC = $.225/bottle Tax Rate = 0.4 Cost of Capital = 0.12

Questions: Using NPV approach, should Zuber accept the capacity expansion project?

Time	Item	CFBT	CFAT	PV at 12%
0	Capitalized installation and equip. cost
0	Expensed installation cost
0	Change in working capital
1 through 3	Advertising expenses
1 through 8	Depreciation
year 1	dR - dC
year 2	dR - dC
3 through 10	dR - dC
6	Overhaul Expense
10	Return of working capital
	NPV

Suppose Zubers marketing department estimates that the demand for their bottles is relatively inelastic and as a result the department estimates that by increasing the price of a bottle by $0.017/bottle from $0.612/bottle to $0.629/bottle demand will stay at 20 million bottles. Given this information, what should Zuber do?