In the long-term planning phase a horizon year of three years was set for the analysis of the long-term criteria required by Kemper, the parent company. It was decided to project profits (based upon sales in units projections) over the three years and calculate the Net Present Value of the proposed introductory plan. The calculation of NPV was made using a discount rate of 4%.
It was estimated that sales in units would grow at a rate of 5% in years two and three. Also, it was decided to assume that unit costs and unit prices would remain constant over all years of the planning period.
It was determined that it would cost $2.50 per unit of capacity to remodel and retool the existing Solclean plant. The capacity figure upon which the plant cost at $2.50/unit was estimated, was that calculated for the horizon year (year three) assuming the 5% annual growth rate in unit sales.
Depreciation was calculated for each of the three years in the planning period using the "straight-line method". It was assumed that the residual value of the Solo plant would be 50% of its value at the beginning of the planning period.
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