Reference no: EM132939867

Question - You are leading a team from the finance group that is evaluating a manufacturing expansion proposal. It is November of 2021, so you plan to analyze annual cash flows as of December of each year, beginning this year (2021). The goal for the expansion is to increase sales by $75 million when it becomes operational in 2024, and this capacity is expected to continue to grow at 8% each year for the 20 year useful life of the new facility. Historically your variable cost ratio has been 30% and you expect this to continue. Fixed costs at the new facility are expected to be $30 million initially, and to grow at a 6% rate over time. These expenses are historical averages and your company's practice is to use these to form the base case analysis of expansions like this. However, the variable cost ratio has varied between 25% and 45% in the past few years, while growth in fixed cost growth has varied between 5% and 9%. You plan to use these variations for your scenario analysis.

Currently, your WACC is 12%. Your marginal tax rate is 25% (federal and state combined) and you expect this to remain constant for planning purposes. For scenario analysis, you plan to evaluate the base case using a 45% tax rate as a separate worst case scenario. For Projects of this size, your practice is to calculate the NPV, IRR, MIRR and Profitability Index.