In: Accounting
Adhesion Inc. is currently evaluating an expansion plan for its operations using an eight-year planning horizon. If the plan is accepted, then a new plant will be built at a cost of $2,500,000 on a vacant lot owned by Adhesion. The land originally cost Adhesion $400,000, although its current market value is $750,000. The expansion plan also requires the purchase of a new machine at a cost of $800,000. This new machine has an annual production capacity of 160,000 units. Installation of the machine will cost an additional $50,000. Finally, an investment of $100,000 in working capital will be required for the operation of the new plant.
Based on its current business, management believes that there is
market demand for an additional 200,000 units of its product
annually at the current price of $15 per unit. Direct costs of
production are estimated to be $8 per unit. Management also intends
to allocate $250,000 of corporate (head office) overhead to the new
plant.
At the end of the eight-year planning horizon, salvage on the
building is estimated to be 25% of its original cost, the salvage
value of the machine is estimated at $85,000 and the anticipated
market value for the land is $900,000. If Adhesion’s marginal tax
rate is 32%, its cost of capital is 14% and the CCA rates on the
building and the machine are 7.5% and 15%, respectively, then
should Adhesion implement the expansion plan? How many minimum
units must Adhesion produce and sell in order for the plan to be
worthwhile?
Answer in Excel would be prefered with calculations please.