Question

In preparation for the PEI Brewing Company tour on Thursday, I would like everyone to outline 2 potential expansion investments that may be used to expand production for the Charlottetown based company.    Perhaps 1 option is to expand the current facility and the other is to create a new facility. Make any necessary assumptions to compare these theoretical alternatives and assume that both alternatives need to create the same level of production output...ex. X Liters of product/year).   I would like you to use the tools and methods covered in class to compare alternatives (ex. IRR, payback period, PW, FW, AEC, etc...whatever you think makes sense).

As per the tour on Thursday and discussions in class, I would like you all to make some assumptions on what you think 2 cash flows would look like (A - renovation/expansion of current facility and B - adding a new building).   I would then ask that you use the tools learned in class to compare the two (PW or FW or IRR or Annual worth).

You can make up any cash flow you wish. Ex. Renovation may cost $1M and be able to generate new revenues of $500k in Year 1, $750k in year 2 and then $1M from Year 3 to year 10.   An new expanded building may cost $5M up front and then result in new revenues of $1M in year 1, $2M in year 2 and then $3M from year 3 to year 10.

You can use these numbers above or pick others. You can also pick an acceptable MARR as an assumption (depending on what model you choose).

Answer 1

Situation 1: (adding new facility): capital cost : $1000 ; annual operating cost: $50 ; Life :10 years

Situation 2 : (renovating) : capital cost: $100; operating cost: $150 ; life : 10 years

cost of capital: 10%

I have used present value method and calculated present value for both scenarios assuming same revenue