Galaga Company is considering expanding their existing vegetable processing operations with a new plant in Abbeville, SC.
Question:
Galaga Company is considering expanding their existing vegetable processing operations with a new plant in Abbeville, SC. The plant is expected to produce 8,472,000 pounds of processed vegetables each year for the next 15 years (1,000 pounds per hour, 24 hours per day, 353 days per year). The land for the plant will cost approximately $500,000. Construction of the physical plant building will cost approximately $18,500,000, and the required investment in equipment will be an additional $22,500,000.
The initial investment in net working capital required to have the plant operating at full capacity will include $2,500,000 in cash, $1,800,000 in receivables, and $650,000 in inventory, which will be partially funded by $250,000 of supplier financing.
The vegetables processed in Abbeville will sell in year = 1 for $2.25 per pound. This selling price per pound is expected to increase by 0.50% per year throughout the life of the project.
Operating expense has two components: 1) a fixed component, and 2) a variable component. The fixed overhead expenses will equal $4,254,000 the first year. These fixed operating expenses will increase each year by 1.00% throughout the life of the project. The variable operating expenses are equal to $0.75 per pound produced. These variable operating expenses are expected to increase by 0.50% per pound per year (for example, year 1 variable operating expenses are $0.75 per pound, and year 2 variable operating expenses are expected to be $0.75 × 1.005 = $0.75375 per pound).
The plant building will be depreciated straight-line over 15 years to a value of zero. The equipment within the plant will be depreciated MACRS according to the 7-year schedule (percentages provided within the spreadsheet template).
For analysis purposes, the firm uses 28.5% for their marginal tax rate for operating income. They assume a tax rate of 15.0% for capital gains. They use a discount rate of 12.0% for capital budgeting purposes.
Assume that the Ireland plant can be sold at the end of the life of the project. Assume that the land portion of this sale will reflect an annual growth rate in the land value of 1.5%. Assume that the building portion of this sale will reflect an annual growth rate in the building value of -10.0% (negative ten percent per year). Assume that the equipment portion of this sale will be $50,000. Assume that the entire initial investment in net working capital is recaptured at the end of the project.
Supply Chain Management Strategy Planning and Operation
ISBN: 978-0133800203
6th edition
Authors: Sunil Chopra, Peter Meindl