Problem

The Newport Company is planning to expand its current spindle product line. The required machinery would cost $520,000. The building that will house the new production facility would cost $1.5 million. The land would cost $350,000, and $250,000 working capital would be required. The product is expected to result in additional sales of $775,000 per year for 10 years, at which time the land can be sold for $500,000, the building for $800,000, and the equipment for $50,000. All of the working capital will be recovered. The annual disbursements for labor, materials, and all other expenses are estimated to be $465,000. The firm's income tax rate is 40%, and any capital gains will be taxed at 35%. The buildings will be depreciated according to a 39-year property class. The manufacturing facility will be classified as a seven-year MACRS. The firm's MARR is known to be 15% after taxes.

Determine the projected net after-tax cash flows from this investment. Is the expansion justified?

Compare the IRR of this project with that of a situation with no working capital.