Jarad Higgins Corp (JHC), a prominent American manufacturer with many production facilities

across the United States, has been considering opening another manufacturing plant. A recently completed

feasibility study costing $2,000,000 concluded that, in order for JHC to maintain its market

share, expansion should be seriously considered.

JWC is considering Worcester as the site of the expansion project citing the availability of

industrial parks as a major reason. If the expansion project proceeds, JHC believes it can

purchase land, building, and the required machinery for $120,000,000. The cost of the building is

expected to be $75,000,000, while that of the machinery will be $5,000,000. The building will

belong to a CCA class that has a rate of 5%; the machinery will belong to a CCA class with a rate

of 25%. (JHC has many assets in these classes.) The land is not considered amortizable and, as

such, does not have a CCA class. Because of changing market conditions, JHC believes that the

competitive advantage associated with the expansion will last only 5 years and after 5 years is

prepared to close the new facility and pursue other opportunities. At the end of the five years

JHC intends to sell the land for an amount equal to its purchase price, to sell the building for

$60,000,000, and write-off the equipment for no value.

Incremental pre-tax revenues associated with the expansion project are estimated to be

$35,000,000 for the first year of the project and are expected to rise at 5% per year for the

remainder of the project. Incremental pre-tax expenses associated with the expansion project are

estimated to be $10,000,000 for the first year of the project but are expected to decline at 4% per

year for the remainder of the project. (Assume the cash flows associated with these incremental

revenues and expenses will occur at the end of each year.)

JWCs working capital will most certainly rise if the project proceeds. An estimate proposes that

the project-related additional working capital requirements by year will need to be the following:

Yr 0. Yr 1. Yr 2 Yr 3 Yr 4 Yr 5

$4,000,000 $5,000,000 $6,000,000 $3,000,000 $1,000,000 $0

An unfortunate choice associated with Worcester is the relatively high cost of labour. JHC

believes that this will result in increased labour costs at its other manufacturing plants across

Canada. JHC intends to phase in these increased costs over a 2-year period, and estimates that it

will have to add $2,000,000 in payroll costs in the first year of the project and add an additional

$2,000,000 (i.e., a total of $4,000,000 above pre-project levels) in the second year of the project.

In further expects that the increased payroll costs at its other plants will then continue

indefinitely. (Assume the cash flows associated with these additional payroll costs will occur at

the end of each year.)

JHCs income tax rate is 40%, and it has decided that an appropriate discount rate for this type of

project is 14%. Construct an NPV analysis to determine if JHC should proceed with its expansion plans.

(Assume that all cash flows and the costs of capital (the discount rate) are given in nominal

terms.)