You are the VP of Finance for a manufacturing firm. The CFO has asked you to analyze the development of a new factory and report back regarding the financial feasibility of the project. To complete the analysis, you will prepare a 5-year financial projection, and compute the Net Present Value and IRR for the project.

CAPITAL INVESTMENT

The capital investment (Year 0) for the new factory will consist of:

$15,000,000 for construction of the factory itself, with a depreciable life of 39 years.

$9,000,000 for equipment installed in the factory, with a depreciable life of 15 years.

$5,000,000 for furniture and fixtures in the factory, with a depreciable life of 7 years.

Your companys method of depreciation is a straight line.

REVENUES

In Year 1 of production, you estimate you will produce and sell (A)________________ units.

Year 2 production will be 5% greater than Year 1

Year 3 production will be 5% greater than Year 2

Year 4 production will be 2% greater than Year 3

Year 5 production will be 2% greater than Year 4

In Year 1 of production, you estimate your sales price will be (B) ______________ per unit.

The sales price in Years 2 and 3 will be the same as Year 1.

The sales price in Year 4 will be 2% higher than Year 3.

The sales price in Year 5 will be 2% higher than Year 4.

COST OF GOOD SOLD

Your Cost of Goods Sold will be (C)__________________ per unit in Year 1.

Years 2 and 3 will be the same as Year 1.

Year 4 will be 2% greater than Year 3.

Year 5 will be 2% greater than Year 4.

EXPENSES

Payroll Management: Management payroll will consist of 40 employees. Management payroll for Year 1 is $75,000 per Management employee. Management payroll per employee will increase 3% each year.

Payroll Manufacturing: Manufacturing payroll will consist of 1 employee for each 1,000 units produced and sold in a year. Manufacturing payroll for Year 1 is $55,000 per Manufacturing employee. Manufacturing payroll per employee will increase 3% each year.

Bank Charges Expenses will be equal to of 1% (.005) of Total Revenues each year.

Employee Training Expense will be equal to $2,500 per employee. The cost per employee will increase each year by an estimated inflation amount equal to 3%.

The following expenses are a fixed estimate grown each year by the inflation estimate

EXPENSE NAME	YEAR 1 EXPENSE	ANNUAL GROWTH RATE
Insurance	$100,000	3%
Maintenance	$500,000	3%
Office Equipment and Supplies	$250,000	3%
Professional Fees (Legal / Accounting)	$3,000,000	3%
Real Estate Taxes	$1,200,000	3%
Telephone and Communications	$450,000	3%
Utilities	$1,000,000	3%

Miscellaneous Expense will be equal to 2% of Total Revenues each year.

INCOME TAXES

Your company income tax rate is 34%

RESIDUAL VALUE / HORIZON VALUE / TERMINAL VALUE

Your assumption for Operating Cash Flows for Year 6+ are that the Cash Flow from Year 5 will continue at a constant value into the future (aka: a perpetuity)

WEIGHTED AVERAGE COST OF CAPITAL

It is assumed that the project will be capitalized with (D)______% long-term debt at a gross rate of 9.00%. The balance of the capital will be common stock, with a projected cost of 20%.

RECOMMENDATION: In this paragraph, you simply state your recommendation. Something like I have prepared an analysis of the construction of the new factory. Based on my analysis, I believe we should pursue (or not pursue) development of the new factory.

ANALYTICAL RESULTS: My analysis included a Net Present Value analysis and calculation of the Internal Rate of Return. I have calculated a projected NPV of $____________ and an IRR of ____%. Describe why these are good or not so good values. This is the basis for your recommendation above.

ATTACHED MATERIALS

Exhibit A: Total Capital Investment and Annual Depreciation Calculation

Exhibit B: 5 Year Projection of Operating Cash Flows (This will be an income statement)

Exhibit C: Summary of Weighted Average Cost of Capital Calculation

Exhibit D: Calculation of Net Present Value and Internal Rate of Return