Capital Budgeting Scenario Essay

865 WordsApr 7, 20134 Pages
Capital Budgeting Scenario 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. On the current proposal for building the new factory below will explain the analysis needed for the projection of the incremental cash flows that will be used for the NPV analysis.…show more content…
This calculation for the proposal of the new project is done over a time period of 10 years. The return in this case the negative return of the life of the factory includes the \$14 million in expected return from selling the factory. The present value formula which considers time and value was also included in the expected recovery. The next table shows the present value of each cash flow. Cash flow was multiplied with the PV column. The net present value is \$1,078,460 also negative, which results in being higher than the NPV at %10. The weighted cost of capital is %6. 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) | If cost of capital was at %12 this would result in the net present value