Hello,

Could you please help me and explain me how to analyze this project.

Capital Budgeting Decision.

XYZ corporation is producing at full capacity, Charles has decided to have Karen 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 $31 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. 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 $17 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. Karen realizes that sales from the new plant will continue into the indefinite future. Because of this, she 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) Charles is not sure about the capital budgeting technique and want like Karen to elaborate clearly what are and are not important elements to engage the capital budgeting decision for the XYZ corporation.

2) Charles is recommended to use profitability index, NPV, and IRR, she wants Karen to examine extensively the benefits and drawbacks of each approach.

3) After the examine of three approaches, Charles would like Karen to analyze the financial viability of the new plant and calculate the profitability index, NPV, and IRR.

4) After the empirical results, Karen would like to provide the recommendation to Charles and Board of directors, what is Karen's recommendation? Charles also wants Karen 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) Charles has instructed Karen to disregard the value of the land that new plant will require. XYZ Corporation already owns it, and a practical matter, it will simply go unused indefinitely. He has asked Karen to discuss this issue in her report.