A company wants to expand their manufacturing facilities . they have two choices ,first to expand the current site at a cost of $290,000 per year for two years to complete the expansion ,or to sell their current site for $1.3 million and purchase a new larger facility at a cost of $ 900,000 in the industrial zone.a) if the annual interest rate is 8%,evaluate the cash flows for the two options described above and decide which is the most financially beneficial to the corporation?b) if the company wants to factor inflation in their calculations,what is the equivalent nominal interest rate if expected inflation rate is 4% in the coming years? critically discuss the significance of including the factor of inflation in corporate finance calculations .

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Asked Oct 16, 2019
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A company wants to expand their manufacturing facilities . they have two choices ,first to expand the current site at a cost of $290,000 per year for two years to complete the expansion ,or to sell their current site for $1.3 million and purchase a new larger facility at a cost of $ 900,000 in the industrial zone.

a) if the annual interest rate is 8%,evaluate the cash flows for the two options described above and decide which is the most financially beneficial to the corporation?

b) if the company wants to factor inflation in their calculations,what is the equivalent nominal interest rate if expected inflation rate is 4% in the coming years? critically discuss the significance of including the factor of inflation in corporate finance calculations .

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Expert Answer

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Step 1

a)

Determine the best option:

The most financially beneficial option is option 1 expansion of current site.

Net present value for option 1:

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$290,000 $290,000 NPV= (10.08) 10.08) = $268.518.52 $248, 628.26 = $517.146.78

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Step 2

Net present value for option 2:

Since, the option 1 has the highest NPV the company can go with expansion of current site.

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NPV $1,300,000 $900.000 $400.000

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Step 3

b)

Compute nominal interest rate:

Nominal interest rate is...

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Nominal interest rate = 8%+4% =12%

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