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?