Reference no: EM132409578
Since LSUS corporation is producing at full capacity, Amanda has decided to have Han 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 LSUS 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. Han 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.
1) How do you identify what are and are not important elements to engage the capital budgeting decision for the LSUS corporation.
2) What are the benefits and drawbacks of utilizing profitability index, NPV, IRR.
3) How do you calculate profitability index, NPV and IRR? Per those calculations, would a new plant be financially viable?
4) What would be the recommendation on building a new plant? How do you formulate a sensitivity analysis? What would happen if we increased the growth rate? What would happen if we decreased the growth rate?
5) If we disregarded the value of the land that the new plant will require and the "LSUS Corporation" already owned the land and it went unused indefinitely. How would this effect the financials?