You are trying to decide if you should build a factory or simply leave the money...

You are trying to decide if you should build a factory or simply leave the money in

the bank collecting interest. It will cost $10M to build the factory and two years of

time. Assume the factory will run for 25 years after that and generate $1.5M per

year in profit each year. Assume a discount rate of 4%. Also assume that all of the

$10M building costs are spent on day-one of construction. Should you build the

factory or leave the money in the bank at a 3% interest rate?

Solutions

Expert Solution

Interest on bank Deposit = Deposit amount * [(1+interest rate)^n -1]

= $10,000,000 * [(1+3%)^27]

= $10,000,000 * [2.22128901 - 1]

= $12,212,890.1

NPV of the Project is $11,665,236.61

Interest earned on bank deposit is $12,212,890.1

Therefore, it is better to leave the company in bank deposit

jeff jeffy answered 1 year ago

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