Problem:
Determine the proposal's appropriateness and economic viability.
Assume spending occurs on the first day of each year and benefits or savings occurs on the last day.
Assume the discount rate or weighted average cost of capital is 10%. Ignore taxes and depreciation.
Proposal: New Factory
A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal's appropriateness and economic viability with the following information:
Building a new factory will increase capacity by 30%.
The current capacity is $10 million of sales with a 5% profit margin.
The factory costs $10 million to build.
The new capacity will meet the companyâ??s needs for 10 years.
The factory is worth $14 million over 10 years.
Using 'Net Present Value'
Explain the effect of a higher or lower cost of capital on a firm's long-term financial decisions.
Analyze the use of capital budgeting techniques in strategic financial management.
Please Explain the calculations.