FIN $332$

Integrative Case Study

You have been asked to evaluate proposal to expand one of $x$ Co's existing plants and make recommendations. $x$ Co$.$ produces batteries and sells them by the case.

Proposal

The current plant has a capacity of $260,000$ cases per year. The first proposal is for major expansion that would increase the plant's current capacity to $500,000$ cases per year. After talking with the firm's design engineers, sales managers and plant operators, you have prepared the following estimates:

Installing the new equipment and redesigning the plant to accommodate the higher capacity will require shutting down the plant for $4$ months. During that time, the plant's production will cease. After the expansion is finished, the plant will operate at its new capacity.

Marketing and selling the additional volume will lead to $$1\mathrm{.}5$ million per year in additional sales, marketing, and administrative costs. The costs will begin in the first year $($even while the plant is under construction and shut down$).$

Expanding the plant will require the purchase of $$3\mathrm{.}0$ million in new equipment and entail up$-$front design and engineering expenses of $$3\mathrm{.}5$ million. These costs will be paid when the expansion begins.

Other Relevant Information

$x$ Co believes that with or without expansion, the technology used at the plant will be obsolete after $6$ years and will have no salvage value, and the plant will need to be completely overhauled at the time.

You have been provided with the following additional information:

With or without expansion, X Co$.$ will be able to sell all it can produce at an average wholesale price of $$75$ per case. This price is not expected to change over the next $6$ years.

X Co$.$ has a gross profit margin on $60\%$ on these batteries

XCo's average net working capital at the end of each year will equal $10\%$ of annual revenue except for the last year of the operation.

X Co$,$ pays a $35\%$ corporate tax rate.