Question
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
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.
Please show step by step on how to complete this problem
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