Question
ACI Group is evaluating the proposal of expanding its RMG factory called ACI Fabrics. ACI Group is currently renting a premise of 40,000 Square feet
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ACI Group is evaluating the proposal of expanding its RMG factory called ACI Fabrics. ACI Group is currently renting a premise of 40,000 Square feet in Savar, and already ACI Fabrics is using 5,000 Square feet from this 40,000 square feet premise. ACI Group has forecasted a strong sales growth in the RMG business and, therefore, wants to evaluate this expansion plan. The Group has already taken significant debt, so the group is carefully evaluating this business opportunity. Under this new project plan, ACI fabrics will open another unit, and for that ACI group will rent additional 10,000 Square feet in the same building. The required rate of return for ACI is 10 percent. The cyclical nature of the business, the uncertainty of raw material prices, technology, environment, and slow pace of liberalization can affect this business. All the clothes will be sold at 2 per cloth. The annual sales commission for this new unit will be 12,000. The proposed project has the following cash flows (in millions):
Year | Cash flow |
0 | -300 |
1 | 50 |
2 | 60 |
3 | 70 |
4 | 200 |
Should they open this new unit? Show detailed NPV calculation.
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