Question

Asked Oct 21, 2019

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Optimal corporation 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.

- 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?
- If Optimal corporation 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

Step 1

1. The net present value of option 1:

**Computation of net present value:**

**Hence, the net present value in option 1 is $517,144.78.**

Step 2

The net present value of option 2:

**Computation of net present value:**

**Hence, the net present value in option 2 is $400,000.**

Step 3

**2. ****Computation of nominal rate of interest:**

**Hence, the nominal rate of interest is 12%.**

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