Project Evaluation

Memoir

To: Martha Ulrich, the plant manager of Nectar Hector Company

From: Haozhe Li, 08240949

Date: April 3, 2012

Subject: Report on estimate of expansion of the syrup facility

1. Introduction

This purpose of this report is to analyze and advise on whether or not to expand the syrup facility. This project should be analyzed an expansion project that is accepted or rejected on its own merits. There was sufficient information to build a two-side discount cash flow analysis; one is keeping producing productivity without moving to new plant, the other is moving plan. Both of sides should be calculated the net cash flow, as it is significant to get the incremental cash flow. Finally, the NPV and IRR of incremental cash flow can be calculated and using them to make a decision. After the analysis, all the data indicates that the new plan would bring huge benefit in the next five years.

2. Conclusion

The net outlay for the new plan would be $1290000 for moving and purchase new facility. The NPV analysis showed the new plan would generate $742873.25, in contrast with current status.

Even more optimistic about the prospects for the next three years, a period of adjustment should be treated carefully. Through breakeven analysis, we get if unit sales would be less than 36243, the project would begin to lose.

3. Recommendation

From the incremental cash flow analysis, the decision would be moving and buying new facilities. However, there are some unpredicted factors should be considered. The one factor is the unstable sales in first three years. When moving to new plant, the first three years are adjustment period. In order to ensure the sales can achieve the predicted target, the location of new plant should be surveyed and studied. Additionally, net working capital level would increase sharply in first three years, so the main problem is to raise the enough funds for the free cash flow. At last, perhaps, the...