EXPANSION PROJECT – RICH INDUSTRIES

Your client, Rich Industries, is considering an expansion of their plant facilities to increase their 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          $   2,000

Sales and Expenses:

New Product Annual Sales                           $ 30,000

Variable Cost Ratio                                                 75%

Fixed Costs (Annual)                                      $      500

Tax Rate                                                                      40%

Depreciation ():

Building                                                                20 year expected Life

Equipment                                                          5 year expected life

Use Straight-line depreciation for you calculation. Assume no salvage value for depreciation calculations.

Salvage Value in Year 5 (for cash flow forecasting purposes):

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?

(Note: you do not need to create a separate memo addressing the problem. Simply answer the question in the spreadsheet you create).

Need to find Net Present Value and Internal Rate of Return