Proposal A: 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 company's needs for 10 years.
• The factory is worth $14 million over 10 years.
****I do not need the entire paper, just the calculations for the paper and short explaination of calculations so that I can explain in the paper. PLEASE do not give me answers below; has already been used, but I do need the same formatting. Thanks!!!!
|
Year
|
Cash Flow
|
PV Factor
|
Present Value
|
|
0
|
(10,000,000)
|
1.0000
|
(10,000,000)
|
|
1
|
150,000
|
0.9091
|
136,364
|
|
2
|
150,000
|
0.8264
|
123,967
|
|
3
|
150,000
|
0.7513
|
112,697
|
|
4
|
150,000
|
0.6830
|
102,452
|
|
5
|
150,000
|
0.6209
|
93,138
|
|
6
|
150,000
|
0.5645
|
84,671
|
|
7
|
150,000
|
0.5132
|
76,974
|
|
8
|
150,000
|
0.4665
|
69,976
|
|
9
|
150,000
|
0.4241
|
63,615
|
|
10
|
14,150,000
|
0.3855
|
5,455,438
|
|
Net present value
|
(3,680,709)
|
|
Year
|
Cash Flow
|
PV Factor
|
Present Value
|
|
0
|
(10,000,000)
|
1.0000
|
(10,000,000)
|
|
1
|
150,000
|
0.9434
|
141,509
|
|
2
|
150,000
|
0.8900
|
133,499
|
|
3
|
150,000
|
0.8396
|
125,943
|
|
4
|
150,000
|
0.7921
|
118,814
|
|
5
|
150,000
|
0.7473
|
112,089
|
|
6
|
150,000
|
0.7050
|
105,744
|
|
7
|
150,000
|
0.6651
|
99,759
|
|
8
|
150,000
|
0.6274
|
94,112
|
|
9
|
150,000
|
0.5919
|
88,785
|
|
10
|
14,150,000
|
0.5584
|
7,901,286
|
|
Net present value
|
(1,078,460)
|
In the event of a 12% cost of capital, the NPV has a negative of $4,644,841 which is much lower than the net present value at a weighted cost of capital of 6% and 10%.
|
Year
|
Cash Flow
|
PV Factor
|
Present Value
|
|
0
|
10,000,000)
|
1.0000
|
(10,000,000)
|
|
1
|
150,000
|
0.8929
|
133,929
|
|
2
|
150,000
|
0.7972
|
119,579
|
|
3
|
150,000
|
0.7118
|
106,767
|
|
4
|
150,000
|
0.6355
|
95,328
|
|
5
|
150,000
|
0.5674
|
85,114
|
|
6
|
150,000
|
0.5066
|
75,995
|
|
7
|
150,000
|
0.4523
|
67,852
|
|
8
|
150,000
|
0.4039
|
60,582
|
|
9
|
150,000
|
0.3606
|
54,092
|
|
10
|
14,150,000
|
0.3220
|
4,555,921
|
|
Net present value
|
(4,644,841)
|