Question: Assume the capital improvement project would cost $10,000,000. Answer the following questions to complete your analysis:
- If the company had $10,000,000 in cash right now that is earning a consistent 8% compounded per year, how much interest would the company forego over the next 10 years if it used the $10,000,000 to pay cash for the project? Hint: What is the future value of $10,000,000 invested today at 8%?
- If the company expects annual net income to increase by $2,000,000 because of the project, compute the payback period, ignoring the time value of money.
- What is the present value of the $2,000,000 annual increase in net income over the next 10 years assuming a discount rate of 8%? Hint:
- What is the present value of a $2,000,000 annuity at 8% for 10 years?