FX, Inc. is a volume manufacturer of high technology automotive mirrors (including cell link and voice activation). FX is looking to expand their operations to add a second product line capable of producing 1.5 Million units per year. The equipment investment cost for this new operation is $30 Million. The project falls under a 7 year MACRS class life and the company estimates that the salvage value will be $3 Million at the end of the 6 year project. The average selling price for each mirror is $100 per unit.

The annual expected sales shown below:

Year 2022 2023 2024 2025 2026 2027

Volume (000) 500 750 1000 1200 1200 1200

The material cost for each mirror is $25 (with 25 % of the material imported from Mexico and 25% from China). The labor to produce each mirror is $20 with additional variable cost of manufacturing at $15 per unit. The fixed cost of manufacturing operations is $15 Million per year. FX maintains 1 month of raw materials and 1 month of WIP and finished goods combined to balance overall automotive demand. Assume that FX has a federal tax rate of 25% and a state tax rate of 5%. Also assume that FX uses a MARR of 15% for all economic analyses.

A. Use the plant information above. Assume that a flexible line could be purchased for $60 Million (instead of the initial $30 Million investment) that would expand capacity to 3.5 Million units. The cost structure is the same as above. The added volumes are normally distributed based on past automotive fluctuations (you define the specific distribution based on historical values). Ignore currency fluctuations. What is the new NPV distribution?

Year 2022 2023 2024 2025 2026 2027

Volume (000) 0 500 1000 1200 1400 1600

Probably of Project 0 .5 .5 .75 .75 .75 (Use can assume each years probably is independent or dependent increase your choice)

B. Assume that FX, Inc. decided finance the $60 Million with $40 million in a new stock offering, $2 Million from the short term loan at 12% and another $18 Million with a bond offering. The firms current stock price is $25 per share. The investment bankers can offer the new offering at $22 per share. There is a 6% float cost for the stock issue. The bonds would be raised at $1,000 par value for 10 years with a market price of $980, and a 10% annual interest payable at the end of each year. Using the weighted average cost of capital as the MARR, what is the NPV for the flexible project? Make and list any necessary assumption (B value, etc.)