Boudreaux Chemical Corp. (BCC) is considering building a new plant to market a new product, GaseXtension. This new product will increase the gas mileage for most vehicles by 30%.

A market study indicates that there would be considerable demand for the product. This new chemical will be sold to service stations, retail stores etc. GaseXtension is added to a vehicles gas through its gas tank.

The following information has been gather to perform the economic analysis (capital budgeting).

The land was purchased by BBC 12 years ago for $650,000 and its current market value after taxes is $4,000,000. The plant and equipment will cost $6,000,000.

The depreciation method will be straight line for 5 years.

The project will be analyzed for a 5 year period (terminate at end of 5 years). If the plant is built, current assets will increase at the initial investment by $1,500,000 while current liabilities will increase by $800,000 (t = 0).

To sustain an increase in sales for year two, current assets will increase by another $500,000 while current liabilities will increase by $300,000 (at t = 1). To sustain the increase in sales for year three, current assets will increase by another $300,000 while current liabilities will increase by $200,000 (at t=2).

At the end of the fifth year, the plant, equipment and the land will sell for $3,500,000 after taxes. If the project goes forward the following Pro Forma Income Statements apply:

In 000,000s

Year 1 2 3,4,5

Sales 8 10 16

CGS 4 5 8

Gross 4 5 8

Admin/Other 1 1 1

EBDT 3 4 7

Taxes are 40%, and the discount rate is 10%. Why dont we use interest expense in the pro forma IS in capital budgeting?

A Find the initial investment, the incremental cash flows and the terminal cash flow. Prepare the capital budgeting cash flow worksheet.

B. Find the PB, NPV, IRR, PI and MIRR

C. Should the new machine be purchased?