Reference no: EM13320232

The Summerville Vitamin Company manufactures bottles of animal-shaped chewable vitamins for children. This product line requires two work centers, tablet manufacturing and packaging. The tablet manufacturing work center has a current capacity of 140,000 bottles per month, and packaging is capable of 100,000 units per month. This year (year 0), monthly sales of the product line are expected to reach 100,000 units. Growth per month is projected at an additional 25,000 units through year 4 (i.e., 125,000 per month in year #1, 150,000 per month in year #2, etc.). Pre-tax profits are expected to be $5 per unit throughout the 4-year planning period. Two alternatives are being considered:

1) Expand both tablet manufacturing and packaging at the end of year 0 to a capacity of 200,000 units per month, at a total cost for both work centers of $2,250,000;

2) Expand packaging at the end of year 0 to 140,000 units per year, matching tablet manufacturing, at a cost of $1,200,000, then expanding both work centers to 200,000 units per month at the end of year 2, at an additional cost at that time of $1,400,000.

Summerville will not consider projects that don't show a 4th year positive net present value using a discount rate of 25%.
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Use the information in Table 6.8. What is the pre-tax cash flow (net present value) for alternative #1 compared to the base case of doing nothing for the next four years?

Less than or equal to $5.1 million

More than $5.1 million but less than $5.3 million

More than $5.3 million less than $5.5 million

More than $5.5 million