EXPANSION PROJECT – RICH INDUSTRIES
Your client, Rich Industries, is considering an expansion of its plant facilities to increase its capacity for a new product line. This new product is expected to have a 5-year life cycle. The company has provided the following information for your analysis.
Capital Costs:
Cost of New Building $ 15,000
Cost of Equipment $ 5,000
Equipment Installation Cost $ 3,000
Net Working Capital Requirements (Upfront) $ 2,000
Sales and Expenses:
New Product Annual Sales $ 30,000
Variable Cost Ratio 75%
Fixed Costs (Annual) $ 500
Tax Rate 40%
Depreciation (use Straight-line depreciation):
Building 20 year expected Life
Equipment 5 year expected life
Salvage Value in Year 5:
Building $ 12,000
Equipment $ 1,000
The controller has told you that Rich Industries uses a 10% hurdle rate for discounting future cash flows.
Your Job: Prepare a spreadsheet calculation of the Net Present Value and Internal Rate of Return for the expansion project under consideration, including supporting information for your work. Answer this question: should the expansion project be undertaken? Why or why not?