Question
IMI has been exploring some growth opportunities. One opportunity that looks promising is a new factory that can produce battery operated Sports Utility Vehicles or
IMI has been exploring some growth opportunities. One opportunity that looks promising is a new factory that can produce battery operated Sports Utility Vehicles or SUVs. SUVs are currently very popular with young families and the demographic is expected to continue to grow. The problem is that many consumers are not convinced a battery alone will provide the sufficient mileage and would prefer a hybrid of gas/battery. A plant (complete with equipment) that could produce hybrid SUVs is expected to cost $11.5M. All factory and equipment costs have a CCA depreciation rate of 20% and an expected salvage value of $1.75M at the end of the projects life in 10 years.
Hybrid SUVs sell for $60,000 with a production cost of $50,000. Net working capital is expected to be $200,000 per year throughout the projects life. IMI expects to be able to produce and sell 500 SUVs a year every year of the projects life.
At a board meeting, the VP of operations, mentions that IMI owns an empty warehouse that is currently on the market for $1,200,000. Instead of selling it, it could easily be converted to a new plant, saving the project money. Everyone nods enthusiastically in agreement. Geoff tasks you with determining whether the expansion and its possible upgrade option are a good investment for the company.
Part 2: Use a WACC of 19% for your calculations in Part 2.
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Should the $1,200,000 warehouse mentioned by the VP be considered a reduction in the initial investment? Explain.
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What is the NPV of the hybrid plant?
3. Should the company invest in a plant to make hybrid SUVs? What are some other things to
consider before making the decision? (No calculation necessary)
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