2) Amanda is recommended to use profitability index, NPV, and IRR, s.docx - 2 Amanda is recommended to use profitability index NPV and IRR she wants Han

2) Amanda is recommended to use profitability index, NPV, and IRR, s.docx

This preview shows page 1 - 3 out of 3 pages.

Image of page 1
2) Amanda is recommended to use profitability index, NPV, and IRR, she wants Han to examine extensively the benefits and drawbacks of each approach Choice 2: Capital Budgeting Decision 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 $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. For Property Placed in Service after December 31, 1986 Recovery 3-Year 5-Year 7-Year 10-Year Year (200% DB) (200% DB) (200% DB) (200% DB) 20-Year (150% DB) 33.33 4445 1481 20.00 32.00 19.20 11.52 11.52 5.76 14.29 24.49 1749 1240 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 15-Year (150% DB) 5.00 9.50 8.55 7.70 6.93
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 3 pages?

Unformatted text preview: 6.23 5.90" 5.90 5.91 5.90 5.91 5.90 5.91 656 3.750 7.219 6.677 6.172 5.713 5.285 4.BBB 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 5.90 5.91 2.95 Switchover to straight-line depreciation 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. 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....
View Full Document

  • Fall '17
  • Bob Maxwell

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors