Investing in a new plant to manufacture a new generation

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Reference no: EM133326549

Case: Company, Daniel Inc., is considering investing in a new plant to manufacture a new generation of copiers developed by the firm's research and development (R&D) department.

Comment on the analysis of the proposal that is summarized below.

1. Project's useful life: The company expects the plant to operate for five years

2. Capital expenditures: $6 million, which includes the construction costs and the costs of machinery and installation. The plant will be built on a parking lot owned by the company.

3. Depreciation: For tax purposes, the building and equipment will be depreciated over ten years using the straight-line method

4. Revenue: The company expects to sell 5,000 copiers in Year 1,10,000 in Year 2, and 20,000 thereafter. The copiers will be sold at $800 each.

5. R&D costs: $1 million spent a year ago and this year

6. Overhead costs: 3.75 percent of the project revenues, as stipulated by the corporate manual

7. Operating costs: Direct and indirect costs are expected to be $500 per unit produced

8. Inventories: The initial investment in raw material, work in process, and finished goods inventories is estimated at $1,500,000

9. Financing cost: 10 percent of capital expenditures per year, as stipulated by the corporate manual

10. Tax rate: 40 percent (includes federal and state taxes)
11. Discount rate: 8 percent. This is Daniel Inc.'s current borrowing rate.

12. Cash-flow stream and net present value (figures are in thousands of dollars; figures from Year 1 to Year 5 are at the year-end)

Reference no: EM133326549

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