Reference no: EM132833187

Since Link corporation is producing at full capacity, Amanda has decided to have Jim examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $1.6 million. This analysis determined that the new plant will require an immediate outlay of $54 million and an additional outlay of $31 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule.

Because of the time necessary to build the new plant, no sales will be possible for the next year. Two years from now, the company will have partial-year sales of $17 million. Sales in the following four years will be $28 million, $37 million, $40 million, and $43 million. Because the new plant will be more efficient than Link corporation's current manufacturing facilities, variable costs are expected to be 65 percent of sales, and fixed costs will be $2.4 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year.

Jim realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 2.5 percent indefinitely. The company's tax rate is 40 percent and the required return is 12 percent.

Problem 1) Amanda is not sure about the capital budgeting technique and want like Jim to elaborate clearly what are and are not important elements to engage the capital budgeting decision for the Link corporation.

Problem 2) Amanda is recommended to use profitability index, NPV, and IRR, she wants Jim to examine extensively the benefits and drawbacks of each approach.

Problem 3) After the examination of three approaches, Amanda would like Jim to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR.

Problem 4) After the empirical results, Han would like to provide the recommendation to Amanda and Board of directors, what is Jim's recommendation?

Problem 5) Amanda also wants Jim to provide a sensitivity analysis and change any one of elements documented before and see what happens? For example, increase or decrease growth rate and at what level the firm can break even when NPV=0.

Problem 6) Amanda has instructed Jim to disregard the value of the land that new plant will require. Link Corporation already owns it, and a practical matter, it will simply go unused indefinitely. She has asked Jim to discuss this issue in his report.