Nissan Motors is thinking about setting up a new manufacturing plant in Farmvill

ID: 2706878 • Letter: N

Question

Nissan Motors is thinking about setting up a new manufacturing plant in Farmville, NC to manufacture a

special edition SUV which will be for sale only in the US. The company bought land in the area a few

months ago, currently valued at $3million, in anticipation of setting up the plant. They also conducted a

nationwide survey to determine which line of SUVs would do well in the US market. The survey cost the

company $15million. If they go ahead with the project they will have to spend $400mil outfitting the plant

with equipment. The equipment will be depreciated straight-line over the 5 year life of the project to its

estimated scrap value of $20,000,000. Based on the response to the survey, the firms marketing

department estimates that they can sell about 6,000 of the special edition vehicles every year for about

$55,000 each. This new vehicle will directly compete with another SUV they currently sell and they

anticipate that they will lose sales of about $50 million each year from the other SUV because of this new

SUV. They plan to hire about 400 new workers for the plant and estimate that these employee salaries will

average about $50,000 each, every year. They plan to move the plant manager from their Georgia plant to

run this new plant and his salary currently costs the company about $800,000 every year. If they go ahead

with the project they will have to increase working capital by about $5mil immediately and this will be

recovered at the end of the project. Other operating costs will run about $100million dollars a year. The

interest expense on a bank loan that might be needed to finance the project will cost the company $8mil

each year. The companys tax rate is 35% and their cost of capital is 20%.

What is NPV for the project?

What is IRR for the project?

What is PI for the project?

What is the payback period for the project?

The required payback period for the project is 4 years. Using only this the payback criteria, should the company accept the project?

NPV= -$10,192,258.23

IRR= 19%

PI= .98

PP= 3.124 years

yes

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