Felicia & Fred’s Firm have now considered furthering their plans for expansion of manufacturing facilities.
Question 1 Their first option is by customizing and refurbishing the large former mill building located in New England near the main production facility. It was previously owned by a company that manufactured lead-based paint and is for sale at a very attractive price. However since litigation had affected the market for lead-based paint, the previous owner had closed this operation, the only remaining lead paint manufacturing facility in the United States. Felicia & Fred’s Chief Engineer, Harry Brown, who has been with the company since inception, has identified remediation, which would be required to be incurred if the company purchases the facility given the prior analysis: $50,000 for an assessment to determine whether contamination was present; the study also was conducted for asbestos and other contaminants typically found in buildings of the same age $400,000 to eliminate and refurbish existing lead paint, which was used within the facility If Felicia & Fred decide to purchase the building, which of the above cash flows would be included in the capital budgeting analysis? If the company decided not to purchase the building, how would your answer change?
Question 2 Alternatively Felicia and Fred have been informed about the possibility of expanding a current small production facility the firm owns on the west coast. The facility is for specialized higher priced items and has been owned by the firm since a prior acquisition two years ago. The facility is operating at capacity however the premise has an additional 5 acres of vacant land and is located within in an industrial park. What are some of the issues relative to this option that Fred and Felicia should be considering?
Question 3 Additionally regardless if the project ends up taking place in the refurbished mill building or on the west coast the project would require an additional investment of 325,000 in equipment to retrofit the new plant. How should such an investment be included in the capital budgeting analysis? Also how are cash flows impacted in each year throughout the project? (Be mindful of depreciation and its best application). Explain and set to example.