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Question 1 RWE Enterprises: Expansion project analysis RWE Enterprises Pty Ltd is a small manufacturing firm located in Brisbane. The firm is engaged in the

Question 1

RWE Enterprises: Expansion project analysis RWE Enterprises Pty Ltd is a small manufacturing firm located in Brisbane. 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 75-kg or 100-kg tubs that are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animals' consumption.

The firm has been running a single production fine for the past five years and is considering the addition of a new fine. The addition would expand the firm's capacity by almost 120% 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 85 degrees Celsius and then must be cooled before beginning the next batch. The total production ran 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 fines increases the overall efficiency of the operation because workers from the fine that is cooling can be moved to the other fine to support the 'canning' process involved in filling the feed tubs.

The equipment for the second production fine will cost $3 million to purchase and install and will have an estimated fife of 10 years, at which time it can be sold for an estimated after-tax scrap value of $200000. Furthermore, at the end of five years, the production fine will have to be refurbished at an estimated cost of $2 million. RWE's management estimates that the new production fine will add $700000 per year in after-tax cash flow to the firm, such that the full 10-year cash flows for the fine are as follows:

YearAfter-tax cash flow

0$(3000000)

1700000

2700000

3700000

4700000

5(1300000)

6700000

7700000

8700000

9700000

10900000

Jamie Dermott: Mutually exclusive project analysis

Jamie Dermott graduated from RMIT University in

December and has been working for about a month as a junior financial analyst at Caledonia Products. When Jamie arrived at work on Friday morning, he found the following memo in his email inbox:

TO: Jamie Dermott

FROM: V. Morrison, CFO, Caledonia Products

RE: Capital budgeting analysis Provide an evaluation of two proposed projects with the following cash flow forecasts:

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