Problem
The TZ Corporation is planning on building a new factory. The land for the factory will cost $2,260,000 payable immediately. The construction of the factory will cost $5,730,000 . Construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years after completion. At the end of its 20 year lifespan, it will be sold for $5,230,000 . The discount rate for this investment is 10%.
The factory will have operating profits of $1,067,000 . You may assume that operating profits flow at the end of each year of operation. You may ignore taxes and ignore the Cost of Capital Allowance (CCA) for this problem.
1. What is the Net Present Value for the factory?
2. What is the Internal Rate of Return for the factory?
3. Should TZ Corporation build the factory?