Question
National Food Processing Company is considering investments in plant modernization and plant expansion. These proposed projects would be completed in 2 years, with varying requirements
National Food Processing Company is considering investments in plant modernization and plant expansion. These proposed projects would be completed in 2 years, with varying requirements of money and plant engineering. Although some uncertainty exists in the data, management is willing to use the following data in selecting the best set of proposals. The resource limitations are as follows:
No. | Project | Investment | Engineering | ||
Year 1 | Year 2 | IRR | Hours | ||
1 | Modernize production line | $300,000 | 0 | 30% | 4,000 |
2 | Build new production line | 100,000 | $300,000 | 43% | 7,000 |
3 | Provide numerical control for new production line | 0 | 200,000 | 18% | 2,000 |
4 | Modernize maintenance shops | 50,000 | 100,000 | 25% | 6,000 |
5 | Build raw material processing plant | 50,000 | 300,000 | 35% | 3,000 |
6 | Buy present subcontractor's facilities for raw material processing | 200,000 | 0 | 20% | 600 |
7 | Buy a new fleet of delivery trucks | 70,000 | 10,000 | 16% | 0 |
- First-year expenditures: $450,000
- Second-year expenditures: $420,000
- Engineering hours: 11,000 hours
The situation requires that a new or modernized production line be provided (projects 1 or 2). The numerical control (project 3) is applicable only to the new line. The company obviously does not want to both buy (project 6) and build (project 5) raw material processing facilities; it can, if desirable, rely on the present supplier as an independent firm. Neither the maintenance shop project (project 4) nor the delivery-truck purchase (project 7) is mandatory.
(a)Enumerate all possible mutually exclusive alternatives without considering the budget and engineering-hour constraints.
(b)Identify all feasible mutually exclusive alternatives.
(c)Suppose that the firms marginal cost of capital will be 14% for raising the required capital up to $1 million. Which projects would be included in the firms budget?
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