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Explain a discounted cash-flow analysis
Course:- Financial Management
Reference No.:- EM13215594




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A firm considers building a new and improved production facility for one of its existing products. It would be built on a piece of vacant land that the firm owns. This land was acquired four years ago at a cost of $200,000; it has a current market value of $1,000,000. The building can be erected for $350,000. Machinery worth $150,000 needs to be bought. Capital cost allowances on a declining balance will be taken on all depreciable assets at a rate of 20 percent. Operating savings from the new production facility are expected to be $300,000 per year for the next 10 years. The salvage value at the end of the 10 years is expected to be $1,500,000, which is solely the value of the land. The firm's tax rate is 40 percent, and the firm's discount rate is 15 percent.

Based on a discounted cash-flow analysis, should the investment to be undertaken?




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