Question

In: Finance

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
Next > < Previous

Related Solutions

Management is trying to decide whether or not to build a new factory. They have estimated...
Management is trying to decide whether or not to build a new factory. They have estimated revenues of $90,000 in year one and $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory in years 2 through 10 would be $40,000. The cost of the new factory is $310,000 The payments required are $80,000 immediately with the remainder due in one year. The company uses an interest rate of...
You are a water filter manufacturer trying to decide if you should invest in an automatic...
You are a water filter manufacturer trying to decide if you should invest in an automatic or manually operated machinery. Both alternatives’ present costs are pegged at $5000, however, they lead to different revenue patterns thereafter. The automatic machine allows for higher production levels and thus more revenues immediately, however more energy costs over time than the manual machine means that net revenues diminish over time. The manual machine does not produce as many filters initially but has no energy...
You are a water filter manufacturer trying to decide if you should invest in an automatic...
You are a water filter manufacturer trying to decide if you should invest in an automatic or manually operated machinery. Both alternatives’ present costs are pegged at $5000, however, they lead to different revenue patterns thereafter. The automatic machine allows for higher production levels and thus more revenues immediately, however more energy costs over time than the manual machine means that net revenues diminish over time. The manual machine does not produce as many filters initially but has no energy...
You are an undiversified investor trying to decide whether you should invest in Disney or Amgen....
You are an undiversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in? A. You would be indifferent B. Disney, because it has the higher R squared C. Amgen, because it has the lower R squared
You are a diversified investor trying to decide whether you should invest in Disney or Amgen....
You are a diversified investor trying to decide whether you should invest in Disney or Amgen. They both have betas of 1.25, but Disney has an R Squared of 73% while Amgen’s R squared is only 25%. Which one would you invest in? A. Disney, because it has the higher R squared B. Amgen, because it has the lower R squared C. You would be indifferent
Benefit Cost Analysis: You are trying to decide if you should place a solar panel on...
Benefit Cost Analysis: You are trying to decide if you should place a solar panel on your apartment. You can buy the solar for 1000 dollars today, and it will reduce your electricity bill by $300/year from today until you graduate four years from now (NOTE: this means it is a 4-year project). If you face an interest rate of 10%, should you buy the solar panel for your apartment? Time Benefits Costs 0 300 1000 1 300 0 2...
The XYZ Company is performing capital budgeting to decide whether to build a factory to produce...
The XYZ Company is performing capital budgeting to decide whether to build a factory to produce bicycles. The factory will cost $1 million at time 0 and $1 million at time 1. It will result in positive cash flows of: Time Amount 2 100,000 3 200,000 4 300,000 5 400,000 6 500,000 The factory will be sold at time 6. The opportunity cost of capital is 4% effective. Find the minimum sale price at time 6 to make the factory...
Question 2 A manager is trying to decide whether to build a small, medium, or large...
Question 2 A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000....
A manager is trying to decide whether to build a small, medium, or large facility. Demand...
A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand...
A corporation is trying to decide whether to open a new factory outlet store. The store...
A corporation is trying to decide whether to open a new factory outlet store. The store will have high, medium, or low demand. Before it decides whether to open the store, the corporation can pay $7,000 immediately for a market survey. The market survey can predict 'high,' 'medium,' or 'low' demand. If the actual demand of the store will be high, there is a 0.6 probability the survey will predict 'high' demand, a 0.06 probability the survey will predict 'medium'...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT