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Junior and Sons. ( J&S ) , is a manufacturing company that has been considering establishing an additional plant. A feasibility study costing $ 2
Junior and Sons. J&S is a manufacturing company that has been considering establishing an
additional plant. A feasibility study costing $ concluded that, for J&S to maintain its market
share, they should expand. If the expansion project proceeds, J&S believes it can purchase land,
building, and the required machinery for $ The cost of the building is expected to be
$ while that of the machinery will be $ The building will be depreciated using
the year IRS depreciation schedule to two decimal places where the first years have the
following depreciation rates: and The machinery will be
depreciated using the year schedule found on the MACRS table distributed in class The land is
not considered amortizable and, as such, will not be depreciated. Because of changing market
conditions, J&S believes that the competitive advantage associated with the expansion will last only
years so after years J&S is prepared to close the new facility and pursue other opportunities. At
the end of the five years J&S intends to sell the land for an amount equal to its purchase price, to sell
the building for $ and writeoff the equipment for no value.
Incremental pretax revenues associated with the expansion project are estimated to be $
for the first year of the project and are expected to rise at per year for the remainder of the project.
Incremental pretax expenses associated with the expansion project are estimated to be $
for the first year of the project but are expected to decline at 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.
J&Ss working capital will most certainly rise if the project proceeds. An estimate proposes that the
projectrelated additional working capital requirements by year will need to be the following:
Year Year Year Year Year Year
$ $ $ $ $ $
An unfortunate choice associated with the chosen location for the plant is the relatively high cost of
labor. J&S believes that this will result in increased labor costs at its other manufacturing plants across
the country. J&S intends to phase in these increased costs over a year period, and estimates that it
will have to add $ in payroll costs in the first year of the project and add an additional$ie a total of $ above preproject 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.
J&Ss income tax rate is and it has decided that an appropriate discount rate for this type of
project is Conduct an NPV analysis to determine if J&S should proceed with its expansion
plans. Assume that all cash flows and the costs of capital the discount rate are given in nominal $ie a total of $ above preproject 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.
J&Ss income tax rate is and it has decided that an appropriate discount rate for this type of
project is Conduct an NPV analysis to determine if J&S should proceed with its expansion
plans. Assume that all d What is the impact on the NPV of the project of the tax shields ass What is the impact on the NPV of the project of the salvage of the assets at the end of year five? What is the impact on the NPV of the proje g What is the impact on the NPV of the project of the incremental expenses associated with the
project excluding the increased payroll costs at J&Ss other plants g What is the impact on the NPV of the project of the incremental expenses associated with the
project excluding the increased payroll costs at J&Ss other plants g What is the impact on the NPV of the project of the incremental expenses associated with the
project excluding the increased payroll costs at J&Ss other plants NPV therefore, the project should be
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