Expand both work centers x and y at the end of the year 0

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Reference no: EM13500701

The B. Sharp Company has a rapidly growing product line that requires going through two work centers, X and Y to manufacture. Work Center X has a current capacity of 50,000 units per year, and Work Center Y is capable of 55,000 units per year, so X is the bottleneck right now. This year (Year 0), sales of the product line are expected to reach 50,000 units. Average growth is projected by the marketing manager (M) at an additional 2,000 units each year through year 5. Pre-tax profits are expected to be $60 per unit throughout the 5 year planning period. Two alternatives are being considered:

a) Expand both Work Centers X and Y at the end of the year 0 to a capacity of 60,000 units per year, at a total cost for both Work Centers of $600,000.

b) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a cost of $450.000; then expand both Work Centers (if necessary) to 60,000 units per year at the end of year 2 (if demand then justifies it), at an additional cost at that time of $400,000. The Sharp Company will not consider projects that don't show a 5 year positive net present value using a discount rate of 20%.

What is the pre-tax cash flow (net present value) for alternative #1 compared to the base case of doing nothing for the next 5 year?

Reference no: EM13500701

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