uicy Candy Company is considering expanding by buying a new (additional) machine that costs $115,000, has zero terminal disposal value, and has an 8-year useful life. The company expects the annual increase in cash revenues from the expansion to be $61,000 per year. It expects additional annual cash costs to be $40,000 per year. Its cost of capital is 6%. Ignore taxes REQUIRED 1. The finance manager has decided that the company should earn 2% more than the cost of capital on any project. Recalculate the original NPV in requirement 1 using the new discount rate and evaluate the investment opportunity. 2. Discuss how the changes in assumptions have affected the decision to expand
Juicy Candy Company is considering expanding by buying a new (additional) machine that costs $115,000, has zero terminal disposal value, and has an 8-year useful life. The company expects the annual increase in cash revenues from the expansion to be $61,000 per year. It expects additional annual cash costs to be $40,000 per year. Its cost of capital is 6%. Ignore taxes
REQUIRED
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1. |
The finance manager has decided that the company should earn 2% more than the cost of capital on any project. Recalculate the original NPV in requirement 1 using the new discount rate and evaluate the investment opportunity. |
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2. |
Discuss how the changes in assumptions have affected the decision to expand. |
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