Mini-Cases 0 RWE Enterprises: Expansion Project Analysis RWE Enterprises, Ine: (RWE) is a small manufacturing firm cost of $2 million. RWE's management estimates that the new located in the hills just outside of Nashville, Tennessee. The production line will add $700,000 per year in after-tax cash flow firm is engaged in the manufacture and sale of feed supplements to the firm, such that the full 10-year cash flows for the line are used by cattle raisers. The product has a molasses base but is as follows: supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. Year After-tax Cash Flow The final product is put in 125-pound or 200-pound tubs that are then made available for the cattle to lick as desired. The ma- $3,000,000 terial in the tub becomes very hard, which limits the animals? 700.000 consumption. 700.000 700.000 The firm has been running a single production line for the past five years and is considering the addition of a new line. The 700,0003 addition would expand the firm's capacity by almost 120 per- (1,300,000) cent because the newer equipment requires a shorter downtime 700,000 between batches. After each production run, the boiler used to -700,000 prepare the molasses for the addition of minerals and vitamins 700,000 700,000 must be heated to 180 degrees Fahrenheit and then must be cooled down before beginning the next batch. The total produc- 900,000 tion run entails about four hours and the cool-down period is two hours (during which time the whole process comes to a halt). Using two production lines increases the overall efficiency of a. If RWE uses a 10 percent discount rate to evaluate invest- the operation because workers from the line that is cooling down ments of this type, what is the net present value of the proj- can be moved to the other line to support the "canning" process ect? What does this NPV indicate about the potential value involved in filling the feed tubs. RWE might create by purchasing the new production line? The second production line equipment will cost $3 mil- b. Calculate the internal rate of return and profitability index lion to purchase and install and will have an estimated life of for the proposed investment. What do these two measures 10 years, at which time it can be sold for an estimated after-tax tell you about the project's viability? scrap value of $200,000. Furthermore, at the end of five years c. Calculate the payback and discounted payback for the pro- the production line will have to be refurbished at an estimated posed investment. Interpret your findings