Assume the discount rate or weighted average cost of capital is 10%. Ignore taxes and depreciation.
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 company’s needs for 10 years.
· The factory is worth $14 million over 10 years.