Which is much lower than net present value at weighted cost

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Reference no: EM131073545

Proposal A: New Factory

A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal's appropriateness and economic viability with the following information:

• Building a new factory will increase capacity by 30%.
• The current capacity is $10 million of sales with a 5% profit margin.
• The factory costs $10 million to build.
• The new capacity will meet the company's needs for 10 years.
• The factory is worth $14 million over 10 years.

****I do not need the entire paper, just the calculations for the paper and short explaination of calculations so that I can explain in the paper. PLEASE do not give me answers below; has already been used, but I do need the same formatting. Thanks!!!!

Year

Cash Flow

PV Factor

Present Value

0

(10,000,000)

1.0000

(10,000,000)

1

150,000

0.9091

136,364

2

150,000

0.8264

123,967

3

150,000

0.7513

112,697

4

150,000

0.6830

102,452

5

150,000

0.6209

93,138

6

150,000

0.5645

84,671

7

150,000

0.5132

76,974

8

150,000

0.4665

69,976

9

150,000

0.4241

63,615

10

14,150,000

0.3855

5,455,438


Net present value

(3,680,709)


Year

Cash Flow

PV Factor

Present Value

0

(10,000,000)

1.0000

(10,000,000)

1

150,000

0.9434

141,509

2

150,000

0.8900

133,499

3

150,000

0.8396

125,943

4

150,000

0.7921

118,814

5

150,000

0.7473

112,089

6

150,000

0.7050

105,744

7

150,000

0.6651

99,759

8

150,000

0.6274

94,112

9

150,000

0.5919

88,785

10

14,150,000

0.5584

7,901,286


Net present value

(1,078,460)

In the event of a 12% cost of capital, the NPV has a negative of $4,644,841 which is much lower than the net present value at a weighted cost of capital of 6% and 10%.

Year

Cash Flow

PV Factor

Present Value

0

10,000,000)

1.0000

(10,000,000)

1

150,000

0.8929

133,929

2

150,000

0.7972

119,579

3

150,000

0.7118

106,767

4

150,000

0.6355

95,328

5

150,000

0.5674

85,114

6

150,000

0.5066

75,995

7

150,000

0.4523

67,852

8

150,000

0.4039

60,582

9

150,000

0.3606

54,092

10

14,150,000

0.3220

4,555,921


Net present value

(4,644,841)

 

Reference no: EM131073545

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