Alternative 1:

Closing the Detroit plant could bring in 4 million from sale of the property. We'd also incur employee termination costs of 6 million. If we stay in Detroit, maintaining the facility and buying a few necessary tools probably cost around 2 million per year. We could probably keep Detroit running at its current level of profitability another 5 to 10 years before it completely falls apart. Then we would have to decide whether to build a new plant or close down the Detroit plant.

Alternative 2

If we were to build a new low-volume plant for the division, we could probably increase our annual cash flows (after accounting for plant depreciation etc.) by about 3 million per year. we'd have to invest about 30 million in the plant and tooling, and start up costs would cost another 6 million. We'd recieve 4 million from the sale of the Detroit plant property, but would not incur employee termination costs.

Note: Wriston used a 10% after-tax hurdle rate to evaluate investment options.

Show how to calculate NPV"s for both of these options