You are leading a team from the finance group that is evaluating a manufacturing expansion proposal. It is November of $2021,$ so you plan to analyze annual cash flows as of December of each year, beginning this year $(2021).$ The goal for the expansion is to increase sales by $$75$ million when it becomes operational in $2024,$ and this capacity is expected to continue to grow at $8\%$ each year for the $20$ year useful life of the new facility. Historically your variable cost ratio has been $30\%$ and you expect this to continue. Fixed costs at the new facility are expected to be $$30$ million initially, and to grow at a $6\%$ rate over time. These expenses are historical averages and your company$$s practice is to use these to form the base case analysis of expansions like this. However, the variable cost ratio has varied between $25\%$ and $45\%$ in the past few years, while growth in fixed cost growth has varied between $5\%$ and $9\%.$ You plan to use these variations for your scenario analysis.

Currently, your WACC is $12\%.$ Your marginal tax rate is $25\%($federal and state combined$)$ and you expect this to remain constant for planning purposes. For scenario analysis, you plan to evaluate the base case using a $45\%$ tax rate as a separate worst case scenario. For Projects of this size, your practice is to calculate the NPV$,$ IRR, MIRR and Profitability Index.

Investment

The project will require several long term asset investments, as well as investment in Net Working Capital. There will be an investment in land, building, and two different types of equipment, which you have taken to calling Crushers and Grinders. Details and timing are below.

Land

The project will require an investment in land of $$50$ million. The land will be purchased in $2021.$ You have estimated that at the end of the project$$s life, you will be able to sell the land for $$130$ million.

Building

The building will be built for $$130$ million in $2022,$ with additional prep work required of $$20$ million in $2023.$ Once operational, the building will be depreciated using the MACRS $39$ year straight line method. For analysis purposes, you ignore any half year or half month convention, and simply use $39$ years. At the end of the project$$s life, you expect to be able to sell the building for $$60$ million.

Crushers

The selected equipment has a $10$ year useful life. It will be purchased in $2022$ for $$10$ million. Installation costs of $$3$ million will be incurred in $2023.$ This pattern will be repeated in years $9$ and $10$ of operations in preparation for the replacement of the equipment so that we cover the project$$s $20$ year operating life. This equipment qualifies as a $7$ year asset for MACRS purposes and you expect this part of the tax laws to remain constant. Salvage values for the Crushers are expected to be $$2$ million each time. However, you expect the purchase price of the Crushers to increase a total of $25\%$ when you repurchase them, with installation costs remaining constant.

Grinders

The selected equipment has a $20$ year useful life. It qualifies as a $10$ year asset under MACRS rules. It will be purchased in $2023$ with a purchase price of $$20$ million and installation of $$5$ million. Its salvage value is expected to be $$3$ million.

NWC

Net Working Capital, primarily in the form of inventory buildup, is expected to be maintained at $10\%$ of next year$$s sales. So$,$ timing wise, the first investment in NWC will be at the end of $2023($operations begin in $2024),$ and then will increase each year based on the increase in Sales for the next year. It is expected that this NWC investment will all be returned at the end of the project$$s life.