Enjoy Manufacturing is contemplating constructing a manufacturing plant to meet the

increased demand for its products. It paid a consulting firm $250,000 for a feasibility study

on the plant. The all-in construction cost of the plant is expected to be $3 million. The

current plant was purchased 3 years ago for $1 million. It is being depreciated straight-line

over 10 years but it is expected it could be functional for another 20 years, at which time it

will be worth nothing. The current plant is expected to be sold for $800,000. Working

capital is expected to have to be increased $100,000 for the new plant. The new plant has

an estimated life of 20 years, at which time its tax basis (net book value) will be zero using

straight-line depreciation. It is expected at the end of its life it can be sold for $400,000.

The additional working capital is assumed to be liquidated and returned to the business at

the end of 20 years.

The estimated incremental pre-tax cash flows generated by the new plant compared to

the old plant are expected to be as follows:

Years 1 & 2-$150,000/year

Year 3- 200,000

Years 4 through 10- 250,000/year

Years 11 through 20- 500,000/year

The companys marginal tax rate is 40%.

The companys required rate of return is 13%.

Calculate the NPV, profitability index, IRR and payback period. State whether Enjoy should

build the plant and why.

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