Question

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.

  1. 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?
  2. 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
Expert Solution
Check Mark
Blurred answer
Students who’ve seen this question also like:
Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
Not helpful? See similar books
Financial Management: Theory & Practice
marketing sidebar icon
Your question is solved by a Subject Matter Expert
marketing sidebar icon
Want to see this answer and more?
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Get 24/7 homework help!
8+ million solutions
Get access to millions of step-by-step textbook and homework solutions
Support from experts
Send experts your homework questions or start a chat with a tutor
Essay support
Check for plagiarism and create citations in seconds
Solve math equations
Get instant explanations to difficult math equations
Students love us.
Students love us.

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Optimal corporation want to expand their manufacturing facilities they have two choices,first to…

A: In option 1, there is cost of $290,000 for two years.In option 2, there is proceeds from selling an…

Q: Jefferson Industries is considereing an expansion. The necessary equipment would be purchased for $8…

A: Initial investment outlay = Purchase Cost - Tax benefit on depreciation + Investment in working…

Q: Ancer Food Enterprises, Inc. is considering launching a new corporate project. The company will…

A: Net present value is the difference between the present value of cash inflow and present value of…

Q: Tannen Industries is considering an expansion. The necessaryequipment would be purchased for $18…

A: a) The computation of initial investment outlay: Hence, the initial investment outlay is $20…

Q: Ancer Food Enterprises, Inc. is considering launching a new corporate project. The company will…

A: The net Present Value(NPV) method is the evaluation of the present value of cash inflows generated…

Q: CreditCard Ltd, an credit card processor is considering the selection of one from two mutually…

A: Click to see the answer

Q: Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset…

A: Answer: Net Cash Flow in Year 3 : $1,936,876.80 NPV : $325,481.72

Q: CreditCard Ltd, an credit card processor is considering the selection of one from two mutually…

A: Click to see the answer

Q: TaiGueLe Enterprises, Inc. is considering launching a new corporate project.  The company will have…

A: Note: The question specifically asks for the change in net working capital for year six. Hence, only…

Q: CreditCard Ltd, an credit card processor is considering the selection of one from two mutually…

A: The payback period is the time period of recovery of initial investment of the project. Company is…

Q: Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset…

A: The free cash flows are calculated by adding tax shield for certain expenses as interest and…

Q: Serkin Corporation is considering an investment in a new product line. The investment would require…

A: Cost of equipment: $100,000 Useful life: 4 years Depreciation per year under straight line method:…

Q: Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball…

A: Equivalent annual savings is $10,226.31.  Computation of equivalent annual savings: Excel spread…

Q: H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed…

A: Initial investment is $2,400,000 Tax rate is 23% Required rate of return  is 10% Estimated annual…

Q: Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed…

A: NPV is the difference between present value of all cash inflow minus present value of all cash…

Q: Under which of the following decision rules will this project be accepted? Which decision rules are…

A: Capital budgeting is the process by which a corporation examines potential large projects or…

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to…

A: It is given that firm must incur $290,000 for two years, if it chooses option 1. The second option…

Q: Quad Enterprises is considering a new three-year expansion project that requires an initial fixed…

A: The evaluation of selection of project is based on the cash flows generated during the life of…

Q: Shell Camping Gear, , is considering two mutually exclusive projects. Each requires an initial…

A: Payback period is the time period required to cover initial investment of the project. It is a…

Q: um, Inc. is considering the purchase of new mining equipment. The equipment will cost $1,500,000 and…

A: NPV is net present value and is the difference between the present value of cash flow and initial…

Q: Osprey Company is considering purchasing a new summer camp in the mountains of North Carolina for…

A: Click to see the answer

Q: Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project…

A: Formulas:

Q: H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed…

A: Net present value is the excess of present value of cash inflows over initial investment made by a…

Q: Using payback, ARR, NPV, IRR, and profitability index to make capital investment decisions Water…

A: ARR-       Annual depreciation       Initial investment 1920000     Less: scrap value 0…

Q: Quad Enterprises is considering a new three-year expansion project that requires an initial fixed…

A: Net Present Value is one of the discounting techniques in capital budgeting which is used to analyze…

Q: Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball…

A: Initial investment of the company is the sum of the cost of high pressure glueball plus after tax…

Q: A company wants to expand their manufacturing facilities . they have two choices ,first to expand…

A: a)Determine the best option:The most financially beneficial option is option 1 expansion of current…

Q: Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball…

A: Formulas: In years 0 cash flow is after tax adjustment for depreciation of initial cost and  After…

Q: Company is considering the development of a plan. The company estimates that the plant and equipment…

A: NPV = Present value of cash inflows  - initial  investment

Q: The management of SoComfy Hotel wishes to capitalize on an investment project that will cost the…

A: Given:

Q: RKE & Associates is considering the purchase of a building it currently leases for $30,000 per…

A: The number of years that will take to recover the investment at given interest rate can be…

Q: San Diego Enterprises is planning to invest in a five-year project costing $270,000. The project is…

A: Payback period is the amount of time required to recover initial investment. It can be calculated…

Q: CreditCard Ltd, an credit card processor is considering the selection of one from two mutually…

A: ARR is accounting rate of return method for evaluation of investment projects. This is calculated by…

Q: eEgg is considering the purchase of a new distributed network computer system to help handle its…

A: Here asked for multi sub part question we will solve first three sub part question for you.  If you…

Q: The Cliney Co. is considering investing $40,000 in a piece of new equipment. If the project is…

A: Given the following information: Investment in new equipment: $40,000 Estimated revenue: $15,000…

Q: Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball…

A: Here, Purchase price of Glueball is $170,000 Selling Price of Old low-pressure glueball is $30,000…

Q: Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls…

A: IRR is a discount rate that equate present value of all cash inflows with initial investment. In…

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to…

A: It is given that firm must incur $290,000 for two years, if it chooses option 1. The second option…

Q: Quad Enterprises is considering a new three-year expansion project that requires an initial fixed…

A: Net Present Value is one of the discounting techniques in capital budgeting which is used to analyze…

Q: Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball…

A: Equivalent annual savings is the annual savings made by operating and maintaining the assets over…

Q: CreditCard Ltd, an credit card processor is considering the selection of one from two mutually…

A: In case of mutually exclusive alternatives company shall select that project that has highest IRR or…

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to…

A: Hence, net present value of cash outflow of $290,000 for two years is $558,250Net present value is…

Q: Quad Enterprises is considering a new three-year expansion project that requires an initial fixed…

A: Book value of the asset at the end of 3 years is calculated as below:

Q: Quad Enterprises is considering a new three-year expansion project that requires an initial fixed…

A: The cash flow for year 0 will be negative because investments are made in project and working…

Q: H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed…

A: NPV is the net present value of cash flows i.e. PV of inflows less PV of outflows. PV of outflows is…

Q: Shell Camping Gear, , is considering two mutually exclusive projects. Each requires an initial…

A: The Payback Period is one of the capital budgeting techniques. It is defined as the number of years…

Knowledge Booster
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
    Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?
    Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
  • Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
    Utah Enterprises is considering buying a vacant lot that sells for 1.2 million. If the property is purchased, the companys plan is to spend another 5 million today (t = 0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this years legislative session. If the tax is imposed, the hotel is expected to produce after-tax cash inflows of 600,000 at the end of each of the next 15 years, versus 1,200,000 if the tax is not imposed. The project has a 12% cost of capital. Assume at the outset that the company does not have the option to delay the project. Use decision-tree analysis to answer the following questions. a. What is the projects NPV if the tax is imposed? b. What is the projects NPV if the tax is not imposed? c. Given that there is a 50% chance that the tax will be imposed, what is the projects expected NPV if the company proceeds with it today? d. Although the company does not have an option to delay construction, it does have the option to abandon the project if the tax is imposed. If it abandons the project, it would complete the sale of the property 1 year from now at an expected price of 6 million. If the company decides to abandon the project, it wont receive any cash inflows from it except for the selling price. If all cash flows are discounted at 12%, would the existence of this abandonment option affect the companys decision to proceed with the project today? e. Assume there is no option to abandon or delay the project but that the company has an option to purchase an adjacent property in 1 year at a price of 1.5 million. If the tourism tax is imposed, then the present value of future development opportunities for this property (as of t = 1) is only 300,000 (so it wouldnt make sense to purchase the property for 1.5 million). However, if the tax is not imposed, then the present value of the future opportunities from developing the property would be 4 million (as of t = 1). Thus, under this scenario it would make sense to purchase the property for 1.5 million. Given that cash flows are discounted at 12% and that theres a 50-50 chance the tax will be imposed, how much would the company pay today for the option to purchase this property 1 year from now for 1.5 million?
    Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
  • The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
    Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
    Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
    Recommended textbooks for you
  • Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage
    EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Intermediate Financial Management (MindTap Course...
    Finance
    ISBN:9781337395083
    Author:Eugene F. Brigham, Phillip R. Daves
    Publisher:Cengage Learning
  • Corporate Fin Focused Approach
    Finance
    ISBN:9781285660516
    Author:EHRHARDT
    Publisher:Cengage
    Financial And Managerial Accounting
    Accounting
    ISBN:9781337902663
    Author:WARREN, Carl S.
    Publisher:Cengage Learning,
    Managerial Accounting
    Accounting
    ISBN:9781337912020
    Author:Carl Warren, Ph.d. Cma William B. Tayler
    Publisher:South-Western College Pub
  • Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage
    EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Intermediate Financial Management (MindTap Course...
    Finance
    ISBN:9781337395083
    Author:Eugene F. Brigham, Phillip R. Daves
    Publisher:Cengage Learning
    Corporate Fin Focused Approach
    Finance
    ISBN:9781285660516
    Author:EHRHARDT
    Publisher:Cengage
    Financial And Managerial Accounting
    Accounting
    ISBN:9781337902663
    Author:WARREN, Carl S.
    Publisher:Cengage Learning,
    Managerial Accounting
    Accounting
    ISBN:9781337912020
    Author:Carl Warren, Ph.d. Cma William B. Tayler
    Publisher:South-Western College Pub