Expansion Project Analysis

BQC$$s marketing department estimates sales of $20,000$ units annually if units sell for a price of $$2000$ each,

therefore annual sales are estimated at $$40$ million.

Additional manufacturing capacity is needed which BQC can acquire by purchasing an existing building at

a cost of $$12$ million. The building will be bought and paid for on December $31,2020.$ The necessary

equipment needed for manufacturing will be installed in late $2020$ and paid for at the same time as the

building. Including transportation and installation, the cost of the equipment is $$8$ million. An additional

$$6$ million investment in net working capital is needed and will be made on December $31,2020.$

The project has an estimated economic life of $4$ years. At the end of this time, the building is expected to

have a market value of $$7\mathrm{.}5$ million and a book value of $$10\mathrm{.}908$ million. The equipment would have a

market value of $$2$ million and a book value of $$1\mathrm{.}36$ million.

The production department has estimated that variable manufacturing costs would total $60\%$ of sales and

that fixed overhead costs $($excluding depreciation$)$ would be $$5$ million a year.

In accordance with the Modified Accelerated Cost Recovery System $($MACRS$),$ depreciation expenses on

the building would be $$156,000$ in $2021$ and $$312,000$ in each of the years $2022,2023,$ and $2024.$ For the

equipment, depreciation expense is $$1,600,000$ in $2021,$ $$2,560,000$ in $2022,$ $$1,520,000$ in $2023,$ and

$$960,000$ in $2024.$

BQC$$s marginal federal$-$plus$-$state tax rate is $40\%$; its cost of capital is $12\%.$ For capital budgeting

purposes, the company$$s policy is to assume that operating cash flows occur at the end of the year.

Because the plant would begin operations on January $1,2021,$ the first operating cash flows would occur on

December $31,2021.$ BQC believes this project has the same amount of risk as an average project.

$**$ESTIMATE THE CASH FLOW$**$