The National Food Processing Company is considering investing in plant modernization and plant expansion. These proposed projects would be completed in two years, with varying requirements of money and plant engineering. Management is willing to use the somewhat uncertain data in Table ST 15.2 in selecting the best set of proposals.
The resource limitations are as follows:
€¢ First-year expenditures: $450,000
€¢ Second-year expenditures: $420,000
€¢ Engineering hours: 11,000 hours
The situation requires that a new or modernized production line be provided (project 1 or project 2 which are mutually exclusive). The numerical control (project 3) is applicable only to the new line. The company obviously does not want to both buy (project 6) and build (project 5) raw-material processing facilities; it can, if desirable, rely on the present supplier as an independent firm. Neither the maintenance-shop project (project 4) nor the delivery-truck purchase (project 7) is mandatory.
(a) Enumerate all possible mutually exclusive alternatives without considering the budget and engineering-hour constraints.
(b) Identify all feasible mutually exclusive alternatives.
(c) Suppose that the firm's marginal cost of capital will be 14% for raising the required capital up to $1 million. Which projects would be included in the firm's budget?
TABLE ST 15.2
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Investment Engineering No Project 1 Modernize production line 2 Build new production line Year 1 Year 2 IRR Hours 30% 4,000 100,000 $300,000 43% 7,000 $300,000 Provide numerical control for new production line 4 Modernize maintenance shops 0 200,000 18% 2,000 50,000 100,000 25% 6,000 Build raw-material processing plant 50,000 300,000 35% 3,000 6 Buy present subcontractor's facilities for raw-material processing 200,000 020% 70,000 10,000 16% 600 7 Buy a new fleet of delivery trucks 0