xiaoming

9

lgirue

gwe

youzizhang

 

All numbers are in millionsfficeffice" />

Project	Initial	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Cost of Capital	NPV
New Factory	-$85	-$17.17	$15.61	$42.45	$42.45	$42.45	$88.00	14.3%	$26.09
Factory Upgrade	-$30	$15	$17	$28				14.3%	$14.89
Factory Upgrade				-$30	$15	$17	$28	14.3%	$14.89
Combined Upgrade Projects	-$30	$15	$17	-$2	$15	$17	$28	14.3%	$24.86

All numbers are in millions, excluding percentages

The new factory has a higher NPV than would remodeling the two factories consecutively. As such, Haggerty should recommend the new factory. The difference between the NPVs of the two strategies is $1.235 million, rounded up to $1.24 million.

 

 

youzizhang

 

Correct answer is B) fficeffice" />

In order to answer this question, we must determine the NPV for both projects, running the three-year remodeling projects consecutively.

New Factory
	Sales	Fixed Costs	Variable Costs	Pretax Cash Flow	After-Tax Cash Flow	Equipment	Working Capital	Building	Depreciation	Cash Flow
Initial								-$85		-$85
Year 1						-$20			$8.33	-$17.17
Year 2	$102.5	$32.5	$41	$29	$19.14		-$7.5		$11.68	$15.61
Year 3	$205	$65	$82	$58	$38.28				$11.68	$42.45
Year 4	$205	$65	$82	$58	$38.28				$11.68	$42.45
Year 5	$205	$65	$82	$58	$38.28				$11.68	$42.45
Year 6	$205	$65	$82	$58	$38.28	$3.25	$7.5	$35	$11.68	$88.00