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1) Your company can build the factory which will generate the following cash flows: Year Cash Flow 0 -1000 1 450 2 450 3 450

1)

Your company can build the factory which will generate the following cash flows:

Year Cash Flow
0 -1000
1 450
2 450
3 450
4 450
5 450

There will be no cash flows after year 5. The appropriate annual interest rate is 4%.

a) What is the net present value of the factory?

b) Everything is as before, but suppose that in year 3, you can extend the factory by paying $450. All other cash flows are unaltered, that is, you will still receive $450 from the factory in that year, before you will invest into the extension. If implemented, this extension will increase the cash flows in years 4 and 5 to $750 (in each year) from $450 now. However, in order for the extension to be feasible, you need to buy the land for the extension now (year 0), as otherwise it will be sold to a competing enterprise. The current owner is asking $100 for the land. All prices are in millions of dollars. Should you accept the offer?

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