| You are considering purchasing a new production facility in order to expand operations. The building and machinery will cost $800,000 and be depreciated over 10 years using the
straight-line method with no salvage value at the end of the equipment-life. You require a 12% rate of return on the project. |
| The cost and revenue information follows in the table below: |
| Revenues | | $ 650,000 |
| Less: | Materials | $ 70,000 |
| | Labor | $ 150,000 |
| | Depreciation | $ 80,000 |
| | Other | $ 10,000 |
| Income before taxes | | $ 340,000 |
| Taxes @ 40% | | $ 136,000 |
| Net Income | | $ 204,000 |
| add back depreciation | | $ 284,000 | (annuity) |
| 1. Determine the NPV of the new facility. |
| 12% at 10 years is | | 5.6502 |
| 284,000 * 5.6502 = | | $ 1,604,656.80 |
| 2. Calculate the IRR (approximate). |
| $800,000 / 284,000 | | 2.8169014085 |
| 650,000 / 284,000 | | 2.2887323944 |
| 3. Calculate the payback period. | | | years |
| $650,000 / 204,000 = | | 3.1862745098 |
| 4. Calculate the accounting rate of return. |
| Net Income / Investment |
| 204000/650000 | | 0.3138461538 |
| 204000/800000 | | 0.255 |
| Taking into considerations all of the calculations above, will you invest in the new production facility? Why or why not? What nonfinancial information will you consider in your decision? |
| There are many things outside of the costs that come into consideration here. I ould take the job as the NPV would be considerably higher than the initial cost and in turn would |
| be a benefit to the company. The things outside of the costs to consider would be the actual location, the people that would come to our store and the demand in the area. |
| the market itself is a hige part of new developments and depending on the cost of maintenance and future aspects of the building itself. |
Roxana87
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