Question

Amanda has instructed Han to disregard the value of the land that new plant will require. LSUS Corporation already owns it, and a practical matter, it will simply go unused indefinitely. She has asked Han to discuss this issue in his report.

Please help with detailed explanation

Choice 2: Capital Budgeting Decision Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $16 million. This analysis determined that the new plant will require an immediate outlay of $54 million and an additional outlay of $31 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule. For Property Maced in Service aer December 21,1 Year S-Year 7.Yen cao. Dal 2006 2005 DA 3331 2010 14.9 2 44.45 22.00 24.49 3 19.20 1749 4 741 1152 12.49 1152 893 5.76 8.92 7 R93 446 10. Yes 15 Year 2004 (150408 10.00 5.00 18.00 9.50 14.40 HSS 11.57 70 9.22 6,93 7.37 621 6.554 5.30 695 5.30 5.91 655 50 3:20 5.91 20-Year (150 DR 3.750 7219 6.677 6177 5.713 5.285 4462 4461 10 11 12 93 461 591 1463 15 H 5.91 10 19 401 4462 41 225 Because of the time necessary to build the new plant, no sales will be possible for the next year. Two years from now, the company will have partial-year sales of $17 million. Sales in the following four years will be $28 million, $37 million, $40 million, and 543 million. Because the new plant will be more efficient than LSUS corporation's current manufacturing facilities, variable costs are expected to be 65 percent of sales, and fixed costs will be $2.4 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year, Han realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 2.5 percent indefinitely. The company's tax rate is 40 percent and the required return is 12 percent