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 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?