EXPANSION PROJECT RICH INDUSTRIES

Your client, Rich Industries, is considering an expansion of its plant facilities to increase its capacity for a new product line. This new product is expected to have a 5-year life cycle. The company has provided the following information for your analysis.

Capital Costs:

Cost of New Building $ 15,000

Cost of Equipment $ 5,000

Equipment Installation Cost $ 3,000

Net Working Capital Requirements (Upfront) $ 2,000

Sales and Expenses:

New Product Annual Sales $ 30,000

Variable Cost Ratio 75%

Fixed Costs (Annual) $ 500

Tax Rate 40%

Depreciation (use Straight-line depreciation):

Building 20 year expected Life

Equipment 5 year expected life

Salvage Value in Year 5:

Building $ 12,000

Equipment $ 1,000

The controller has told you that Rich Industries uses a 10% hurdle rate for discounting future cash flows.

Your Job: Prepare a spreadsheet calculation (like the attached image) of the Net Present Value and Internal Rate of Return for the expansion project under consideration, including supporting information for your work. Answer this question: should the expansion project be undertaken? Why or why not?

A B C D E T G Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 1 2 Cost of New Building 3 Cost of Equipment 4 Installation Cost/Equipment (can be depreciated) 5 Net Working Capital Requirement 6 Initial Investment 7 8 Sales 9 Variable Costs 10 Fixed Costs 11 Depreciation - Building 12 Depreciation - Equipment 13 EBIT 14 Taxes (40%) 15 NOPAT 16 Depreciation - Building 17 Depreciation - Equipment 18 Operating Cash Flow 19 20 After-Tax Salvage Value - Building 21 After-Tax Salvage Value - Equipment 22 NWC Investment Recovery 23 Cash Flows 24 25 Discount Rate 26 NPV 27 IRR 10% $0.00 #NUM! 28