Question
You are manager of a manufacturing business. Business is going very well and one production line is at full capacity. You want to double the
You are manager of a manufacturing business. Business is going very well and one production line is at full capacity. You want to double the size of the production line. Engineering has estimated the cost and time required. It can be accomplished without effecting the existing production. The timing of the cash flows for the facility is as follows.
Month | Cash Flow |
1 | $ (30,000.00) |
2 | $ (55,000.00) |
3 | $ (65,000.00) |
4 | $ (60,000.00) |
5 | $ (65,000.00) |
6 | $ (80,000.00) |
7 | $ (100,000.00) |
8 | $ (100,000.00) |
9 | $ (130,000.00) |
10 | $ (150,000.00) |
11 | $ (190,000.00) |
12 | $ (210,000.00) |
13 | $ (235,000.00) |
14 | $ (185,000.00) |
15 | $ (210,000.00) |
16 | $ (60,000.00) |
Total | $ (1,925,000.00) |
The current cost of capital is 9% APR. What is the total cost of the project?
You estimate that sales for the first year will be at 35% of capacity and increase to 65% in year 2. Sales after year 2 are estimated at 90% of capacity. The current production line generates $950,000 in net profit. The profit will be proportional to the percent capacity utilized. The company demands a minimum 20% internal rate of return for capital projects. Does the 10-year rate of return meet the company requirements? Assume that the company pays interest on the capital for the entire ten years.
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