RWE Enterprises: Expansion Project Analysis RWE Enterprises,Inc. (RWE) is a small manufacturing firm located in the hills justoutside of Nashville, TN. The firm is engaged in the manufactureand sale of feed supplements used by cattle raisers. The producthas a molasses base but is supplemented with minerals and vitaminsthat are generally thought to be essential to the health and growthof beef cattle. The final product is put in 125-pound or 200-poundtubs that are then made available for the cattle to lick asdesired. The material in the tub becomes very hard, which limitsthe animals’ consumption. The firm has been running a singleproduction line for the past five years and is considering theaddition of a new line. The addition would expand the firm’scapacity by almost 120% since the newer equipment requires ashorter down time between batches. After each production run theboiler used to prepare the molasses for the addition of mineralsand vitamins must be heated to 180 degrees Fahrenheit and then mustbe cooled down before the next batch. The total production runentails about 4 hours and the cool down period is 2 hours (duringwhich time the whole process come to a halt). Using two productionlines increases the overall efficiency of the operation sinceworkers from the line that is cooling down can be moved to theother line support the “caning” process involved in filling thefeed tubs. The second production line equipment will cost $3million to purchase and install and will have an estimated life of10 years at which time it can be sold for an estimated after-taxscrap value of $200,000. Furthermore, at the end of five years theproduction line will have to be refurbished at an estimated cost of$2 million. RWE’s management estimates that the new production linewill add $700,000 per year in after-tax cash flow to the firm suchthat the full 10-year cash flows for the line are as follows:

Year                                    After-tax Cash Flow

0                                            $(3,000,000)

1                                            700,000

2                                             700,000

3                                            700,000

4                                           700,000

5                                           (1,300,000)

6                                           700,000

7                                            700,000

8                                            700,000

9                                             700,000

10                                          900,000

A. If RWE uses a 10% discount rate to evaluate investments ofthis type, what is the net present value of the project? What doesthis NPV indicate about the potential value RWE might create bypurchasing the new production line?

B. Calculate the internal rate of return and profitability indexfor the proposed investment. What do these two measures tell youabout the project’s viability?

C. Calculate the payback and discounted payback for the proposedinvestment. Interpret your findings