Mini-Cases RWE Enterprises: Expansion Project Analysis flow to the firm, so the full 10-year cash flows for the line are RWE Enterprises, Inc. (RWE), is a small manufacturing firm as follows: located in the hills just outside of Nashville, Tennessee. The firm is engaged in the manufacture and sale of feed supplements used by cattle raisers. The product has a molasses base but is supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. The final product is put in 125-pound or 200-pound tubs, which are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animals' consumption. Year After-Tax Cash Flow 0 $(3,000,000) 700,000 700,000 700,000 700,000 (1,300,000) 700,000 700,000 700,000 700,000 900,000 The firm has been running a single production line for the past 5 years and is considering the addition of a new line. The addition would expand the firm's capacity by almost 120 percent because the newer equipment requires a shorter downtime between batches. After each production run, the boiler used to prepare the molasses for the addition of minerals and vitamins must be heated to 180 degrees Fahrenheit and then cooled down before beginning the next batch. The total production a. If RWE uses a 10 percent discount rate to evaluate invest- run entails about four hours, and the cool-down period is two ments of this type, what is the NPV of the project? What hours (during which time the whole process comes to a halt). does this NPV indicate about the potential value RWE Using two production lines increases the overall efficiency of might create by adding the new production line? the operation because workers from the line that is cooling down can be moved to the other line to support the "canning" process b. Calculate the IRR and PI for the proposed investment. What involved in filling the feed tubs. 10 do these two measures tell you about the project's viability? The equipment for the second production line will cost $3 c. Calculate the payback and discounted payback periods for million to purchase and install and will have an estimated life the proposed investment. Interpret your findings. of 10 years, at which time it can be sold for an estimated after- tax scrap value of $200,000. Furthermore, at the end of 5 years Jamie Dermott: Mutually Exclusive the production line will have to be refurbished at an estimatedProject Analysis cost of $2 million. RWE's management estimates that the new production line will add $700,000 per year in after-tax cash Jamie Dermott graduated from Midland State University in June and has been working for about a month as a junior financial