Introduction to Corporate Finance
Not what you're looking for?
A company is considering 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 $500,000; it has a current market value of $800,000. The building can be erected for $600,000. Machinery (equipment) worth $120,000 needs to be bought. The company will finance the construction of the building and the purchase of the equipment by borrowing $720,000 for 10 years at 10% interest. Interest will be paid annually and the full
amount of the loan will be repaid in one payment at the end of the 10 years. The company's net working capital will increase by $100,000 if the new production facility is built. Operating savings from the new production facility are expected to be $300,000 per year for the next 10 years. The total salvage value at the end of the 10 years is expected to be $1,000,000- one quarter of which is attributable to the building and equipment. The building and equipment will be amortized on a straight-line basis over 10 years. The firm's tax rate is 40 percent and CCA
will be taken on all depreciable assets at a rate of 20%. The firm's weighted average cost of capital (WACC) is estimated at 15 percent. Should the company build the new and improved production facility?
Purchase this Solution
Solution Summary
The solution discusses the introduction to corporate finance.
Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.