The production line produces a product which currently has annual sales of $1,000,000 and has a contribution to the business beyond ingredients of $500,000:

• Your line is currently operating at full standard capacity.
• You are putting in new equipment which will make the line more efficient and last for 10 years.
• The equipment will increase the capacity of the line by 30%.- so add capability to produce $300,000 more per year and will eliminate 3 positions of manual labor when fully operational the second year.
• A manual position of labor costs $30000 per year with benefits.
• A 6 month supply of ingredients is kept at all times. It is expected that the learning curve will result in zero increased capacity in year 1 but the full 30% in year 2.
• The equipment will costs $600,000.
• Engineering and installation will cost $100,000.
• Sales will grow at a rate so all production can be sold.
• Advertising and promotion to get that growth will cost $50,000 per year.
• The company has a WACC of 15% but uses a hurdle rate of 18% for projects of this risk type.

OUTLINE THE CASH FLOWS IN THE CHART BELOW - please note some cash flows are positive and some are negative - you will need to make sure they sum appropriately

EVALUATE THE INVESTMENT WITH PAYBACK, IRR and NPV

YEAR 0-10

CASH FLOW CALCULATIONS: 

capacity of new line 

sales growth

additional ingredients

additional advertising

savings from eliminating manual positions

additional inventory

cost of equipment

cost of installation

NET CASH FLOW:

Payback

IRR

NPV