1. ABC production requirements for the first year (2012) the expanded facility w

Question

1. ABC production requirements for the first year (2012) the expanded facility would be operating would be 25,000 units more than the present facility can presently produce. (25,000 incremental units).
2. Production of ABC product units will increase an incremental 10% each year thereafter over the ten-year life of the project.
3. It will cost $200,000 for the plant expansion. Alder will use straight line depreciation over a ten-year period with a $50,000 salvage value. (Depreciate $200,000 - $50,000 = $150,000 over ten years)
4. ABC sells the units for $7 each and the variable costs to produce each unit are $4..
5. The capital investment includes replacing several old machines with brand new machines. As a result, total maintenance costs for the facility will be reduced an incremental $15,000 a year. ($15,000 cost savings)
6. Accounting and computer costs will increase $25,000 in the first year and remain the same for the life of the project..
7. Overall selling costs will increase by $30,000 per year..
8. Working capital for Alder totals 25% of sales. Figure in the incremental working capital required for each year based on incremental sales for that year over the previous year for each year of the project and recover the full working capital infusion it at the end of the project.
9. Alder has a tax rate of 30%
10. Alder has a hurdle rate of 15% on all its capital projects.

Compute the Net Present Value and Internal Rate of Return on this project. Should Alder undertake this expansion opportunity?

Explanation / Answer

5. The capital investment includes replacing several old machines with brand new machines. As a result, total maintenance costs for the facility will be reduced an incremental $15,000 a year. ($15,000 cost savings)

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