22 Jul BASED ON A DISCOUNTED CASH-FLOW ANALYSIS SHOULD THE INVESTMENT TO BE UNDERTAKEN?
A firm considers building a new and improved production facility for one of its existing products. I Show more A firm considers 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 $200000; it has a current market value of $1000000. The building can be erected for $350000. Machinery worth $150000 needs to be bought. Capital cost allowances on a declining balance will be taken on all depreciable assets at a rate of 20 percent. Operating savings from the new production facility are expected to be $300000 per year for the next 10 years. The salvage value at the end of the 10 years is expected to be $1500000 which is solely the value of the land. The firms tax rate is 40 percent and the firms discount rate is 15 percent. Question: Based on a discounted cash-flow analysis should the investment to be undertaken? Show less
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