The Boning Co., an aircraft manufacturing company, is considering an expansion in the production of their famous 877 airliner. Determine whether the company should accept or reject the expansion project using (1) the IRR rule and (2) the NPV rule. For the IRR rule, use the project cost of capital as the hurdle rate.

A. The expansion will require the purchase of machineries that cost $47,000,000. It will cost an additional $1,000,000 to install, which will be included in the total investment costs. These costs will be fully depreciated (to book value = 0) over the project life of 20 years using straight-line depreciation. The machineries are estimated to have a market value of $2,000,000 at the end of the project.

B. The company spent $250,000 to train workers to use the new machinery. C. The expansion is expected to increase sales by $17,000,000 per year. 10% of this sales

increase is anticipated due to the demand for replacing the 205 Airliner that has been

serving the companys existing airline company customers. D. The increase in costs due to the expansion is estimated to be $7,000,000 per year.

Additionally, the company will allocate an additional overhead cost of $1,800,000 to the expanded division for the 877 airliner, while the companys total overhead costs will remain the same due to the downsizing of existing divisions.

E. The company has already paid $110,000 to a consulting company for analysis of the internal product competition described in (C).

F. Because of the project, the company will need additional working capital of $2,500,000 which can be fully liquidated at the end of the project.

G. The companys corporate tax rate and capital gains tax rate is 35% and 20%, respectively. H. The cost of capital for the project is 12%.