Since LSUS corporation is producing at full capacity, Amanda has decided to have Han examine the...

   

Transcribed Image Text:

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 S31 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. For Property Maced in Service ater December 31, 196 hecovery Yeer 3Year (200 Da S-Year Year 10 Year 15-Year 20-Yer (200 DB (200 DR) (200% D (150% De) 1so% De 33.33 20.00 1429 10.00 3750 14.49 18.00 9.50 7219 1481 1920 1749 14 40 741 12.49 11.52 770 6177 1152 9.22 693 S76 892 621 895 4522 591 10 655 590 4461 326 591 4.462 4462 34 5.90 4.401 591 4.462 16 295 17 4.462 19 20 4.461 "t se 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 S17 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) Amanda is not sure about the capital budgeting technique and want like Han to elaborate clearly what are and are not important elements to engage the capital budgeting decision for the LSUS cогрогation. 2) Amanda is recommended to use profitability index, NPV, and IRR, she wants Han to examine extensively the benefits and drawbacks of each approach. 3) After the examine the three approaches, Amanda would like Han to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR. 4) After the empirical results, Han would like to provide the recommendation to Amanda and Board of Directors, what is Han's recommendation? Amanda also wants Han 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. 5) Amanda has instructed Han to disregard the value of the land that the new plant will require. LSUS Corporation already owns it, and, as a practical matter, it will simply go unused indefinitely. She has asked Han to discuss this issue in his report. to be depreciated on a 20-year MACRS schedule. For Property Placed in Service after December 1, 1986 3-Year (200% D8) 5-Year (200% D8) 7-Year (200% DB) 10-Year (200% D8) 15-Year 20-Year Recovery Year (150% DB) (150% DB) 3333 20.00 14.29 10.00 5.00 3.750 44 45 32.00 24,49 18.00 950 7.219 1481 17.49 14.40 事 6.677 4 7:41 11.52- 11.52 7.70 6.172 E6B 8.92 11.52 9,22 6.93 5.713 5.76 737 6.23 5.285 655 6.55 493 5.90 6.56 5.91 4.462 10 6.55 5:50 11 3.28 4.462 12 4.401 13 5.91 4.462 14 5.90 591 295 4.461 主5 16 17 4.462 18 4.46 19 4.463 20 21 "Snchover ito strate c o the time necessary to build the new plant, no sales will be possible for the r 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 S31 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. For Property Maced in Service ater December 31, 196 hecovery Yeer 3Year (200 Da S-Year Year 10 Year 15-Year 20-Yer (200 DB (200 DR) (200% D (150% De) 1so% De 33.33 20.00 1429 10.00 3750 14.49 18.00 9.50 7219 1481 1920 1749 14 40 741 12.49 11.52 770 6177 1152 9.22 693 S76 892 621 895 4522 591 10 655 590 4461 326 591 4.462 4462 34 5.90 4.401 591 4.462 16 295 17 4.462 19 20 4.461 "t se 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 S17 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) Amanda is not sure about the capital budgeting technique and want like Han to elaborate clearly what are and are not important elements to engage the capital budgeting decision for the LSUS cогрогation. 2) Amanda is recommended to use profitability index, NPV, and IRR, she wants Han to examine extensively the benefits and drawbacks of each approach. 3) After the examine the three approaches, Amanda would like Han to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR. 4) After the empirical results, Han would like to provide the recommendation to Amanda and Board of Directors, what is Han's recommendation? Amanda also wants Han 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. 5) Amanda has instructed Han to disregard the value of the land that the new plant will require. LSUS Corporation already owns it, and, as a practical matter, it will simply go unused indefinitely. She has asked Han to discuss this issue in his report. to be depreciated on a 20-year MACRS schedule. For Property Placed in Service after December 1, 1986 3-Year (200% D8) 5-Year (200% D8) 7-Year (200% DB) 10-Year (200% D8) 15-Year 20-Year Recovery Year (150% DB) (150% DB) 3333 20.00 14.29 10.00 5.00 3.750 44 45 32.00 24,49 18.00 950 7.219 1481 17.49 14.40 事 6.677 4 7:41 11.52- 11.52 7.70 6.172 E6B 8.92 11.52 9,22 6.93 5.713 5.76 737 6.23 5.285 655 6.55 493 5.90 6.56 5.91 4.462 10 6.55 5:50 11 3.28 4.462 12 4.401 13 5.91 4.462 14 5.90 591 295 4.461 主5 16 17 4.462 18 4.46 19 4.463 20 21 "Snchover ito strate c o the time necessary to build the new plant, no sales will be possible for the r

Answer rating: 100% (QA)

solution Figin millions Growth 250 Base Case Year 0 1 2 3 4 5 6 1Initial addl outlay 54 31 Operating cash flows Projected sales 17 28 37 40 43 Variabl... View the full answer