Consider an investment for a new manufacturing process line within a manufacturing plant. This investment cost will be $6.5 Million. The product is a new 5 year program with an expected annual volume of 500,000 units. The selling price for the units will be $100 per unit. The material cost for each unit is $35.00, the labor cost is $15.00 per unit, and the variable burden is $20 per unit. The allocated fixed cost $2.0 Million and will require an additional fixed cost of $1.0 million if the project is put in production. Assume a tax rate of 35% federal and 4% state. Also, assume that the MARR is 15% and that the investment is depreciated at a 7 year MACRS class life and will have a salvage value of $1.0 million. Assume that the working capital investment is 1 month raw material inventory and 1 month work-in-process (WIP) and finished (for the investment analysis assume all materials are finished). Assume 2 month for receivables and 1 month payables for the working capital investment. (Use Excel sheet for calculation and answer the questions)
1) Calculate the NPV for the investment.
2) If $5 Million of the investment is borrowed at 10%, what would be the NPV of the investment?
3) If the company could convert to “Just-in-time” for raw materials (no raw materials) and reduce the WIP by 50%, how would this change the present worth?