Junior and Sons. $($J&S$),$ is a manufacturing company that has been considering establishing an

additional plant. A feasibility study costing $$2,000,000$ 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 $$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 be depreciated using

the $20-$year IRS depreciation schedule $($to two decimal places$)$ where the first $5$ years have the

following depreciation rates: $3\mathrm{.}75\%,7\mathrm{.}22\%,6\mathrm{.}68\%,6\mathrm{.}18\%,$ and $5\mathrm{.}71\%.$ The machinery will be

depreciated using the $7-$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

$5$ years so after $5$ 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 $$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.$)$

J&S$$s 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:

Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

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

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 $2-$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.

J&S$$s income tax rate is $40\%,$ and it has decided that an appropriate discount rate for this type of

project is $14\%.$ 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

terms.$)$

Worksheet & Supporting Calculations, write the answer of each queation separately. Calculate the answer separately of each of the following questions and write it on the blank:

a$)$ What is the impact on the NPV of the project of the $$2,000,000$ feasibility study? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

b$)$ What is the impact on the NPV of the project of the investment in land, building and new

equipment? $($Ignore the effect of any possible tax shields and salvage$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

c$)$ What is the impact on the NPV of the project of the net working capital requirements associated

with the project? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

d$)$ What is the impact on the NPV of the project of the tax shields associated with the use of the assets

in the project? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

e$)$ What is the impact on the NPV of the project of the salvage of the assets at the end of year five?

$($Ignore the effect of any lost tax shields.$)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

f$)$ What is the impact on the NPV of the project of the incremental revenues associated with the

project? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

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&S$$s other plants$)?\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

h$)$ What is the impact on the NPV of the project of the increased payroll costs at J&S$$s other plants? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

i$)$ What is the NPV of the project & what is your recommendation?

NPV $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_$ therefore, the project should be $\_\_\_\_\_\_\_\_\_\_\_\_\_\_.$