Choice 2 Capital Budgeting Decision Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the feasibility of a new manufacturing plant This expansion would represent a major capital outlay for the company A preliminary analysis of the project has been conducted at a cost of $1 6 million This analysis determined that the new plant will require an immediate outlay of $54 million and an additional outlay of $31 million in one year The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20 year MACRS schedule For Property Placed in Service after December 31, 1986 Recovery Year 3 Year (200 DB) 5 Year (200 DB) 7 Year (200 DB) 10 Year (200 DB) 15 Year (150 DB) 20 Year (150 DB) 1 33 33 20 00 14 29 10 00 5 00 3 750 2 44 45 32 00 24 49 18 00 9 50 7 219 3 14 81 19 20 17 49 14 40 8 55 6 677 4 7 41 11 52 12 49 11 52 7 70 6 177 5 11 52 8 93 9 22 6 93 5 713 6 5 76 8 92 7 37 6 23 5 285 7 8 93 6 55 5 90 4 888 8 4 46 6 55 5 90 4 522 9 6 56 5 91 4 462 10 6 55 5 90 4 461 11 3 28 5 91 4 462 12 5 90 4 461 13 5 91 4 462 14 5 90 4 461 15 5 91 4 462 16 2 95 4 461 17 4 462 18 4 461 19 4 462 20 4 461 21 2 231 Because of the time necessary to build the new plant, no sales will be possible for the next year Two years from now, the company will have partial year sales of $17 million Sales in the following four years will be $28 million, $37 million, $40 million, and $43 million Because the new plant will be more efficient than LSUS corporation's current manufacturing facilities, variable costs are expected to be 65 percent of sales, and fixed costs will be $2 4 million per year The new plant will also require net working capital amounting to 8 percent of sales for the next year Han realizes that sales from the new plant will continue into the indefinite future Because of this, he believes the cash flows after Year 5 will continue to grow at 2 5 percent indefinitely The company's tax rate is 40 percent and the required return is 12 percent 3) After the examine the three approaches, Amanda would like Han to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR

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Choice 2: Capital Budgeting Decision Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the feasibility of a new

Choice 2: Capital Budgeting Decision

Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $1.6 million. This analysis determined that the new plant will require an immediate outlay of $54 million and an additional outlay of $31 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule.

For Property Placed in Service after December 31, 1986

Recovery Year

3-Year (200% DB)

5-Year (200% DB)

7-Year (200% DB)

10-Year (200% DB)

15-Year (150% DB)

20-Year (150% DB)

33.33

20.00

14.29

10.00

5.00

3.750

44.45

32.00

24.49

18.00

9.50

7.219

14.81*

19.20

17.49

14.40

8.55

6.677

7.41

11.52*

12.49

11.52

7.70

6.177

11.52

8.93*

9.22

6.93

5.713

5.76

8.92

7.37

6.23

5.285

8.93

6.55*

5.90*

4.888

4.46

6.55

5.90

4.522

6.56

5.91

4.462*

6.55

5.90

4.461

3.28

5.91

4.462

5.90

4.461

5.91

4.462

5.90

4.461

5.91

4.462

2.95

4.461

4.462

4.461

4.462

4.461

2.231

Because of the time necessary to build the new plant, no sales will be possible for the next year. Two years from now, the company will have partial-year sales of $17 million. Sales in the following four years will be $28 million, $37 million, $40 million, and $43 million. Because the new plant will be more efficient than LSUS corporation's current manufacturing facilities, variable costs are expected to be 65 percent of sales, and fixed costs will be $2.4 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year. Han realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 2.5 percent indefinitely. The company's tax rate is 40 percent and the required return is 12 percent.

3) After the examine the three approaches, Amanda would like Han to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR.