Manufacturing Investment Analysis

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 1.3 Million units per year. The equipment investment cost for this new operation is $27 Million. The project falls under a 7 year class life and the company estimates that the salvage value will be $2.7 Million at the end of the 6 year project. The average selling price for each mirror is $85 per unit. The annual expected sales shown below:

Year	2018	2019	2020	2021	2022	2023
Volume(000)	600	750	1000	1200	1200	1200

The material cost for each mirror is $20 (with 20 % of the material imported from Canada and 30% from China). The labor to produce each mirror is $13 with additional variable cost of manufacturing at $15 per unit. The fixed cost of manufacturing operations is $10 Million per year. FX maintains 1 month of raw materials and 1 month of WIP and finished goods to balance overall automotive demand. Assume that FX has a federal tax rate of 35% and a state tax rate of 4%. Also assume that FX uses a MARR of 15% for all economic analyses. The company will borrow $10 Million of the $27 Million needed at 10%. Assume inflation is estimated at 2% and the pricing is locked for the length of the project.

Assume that a flexible line could be purchased for $40 Million that would expand capacity to 3.5 Million units. The cost structure is the same. The company will borrow $10 Million of the $40 Million needed at 10%. The salvage value will be 10% of initial investment. The added volumes are normally distributed with the same variance as above. What is the new NPV distribution?

Year	2018	2019	2020	2021	2022	2023
Volume(000)	0	500	1000	1600	1600	1600
Probability of project	0	0.5	0.5	0.75	0.75	0.75

(Use can assume each years probably is independent or dependent increase your choice)

Assume that FX, Inc. decided to finance the remaining $30 million with a new stock offering, $2 Million from the short term loan (instead of $10 Million loan defined in question e) and another $8 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 7% flotation 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 12% 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 line project? Make and list any necessary assumption (B value, etc.).