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5. Although your accountant insists that the entire $1.6 billion investment be fully depreciated, you know that it may be possible to sell the
5. Although your accountant insists that the entire $1.6 billion investment be fully depreciated, you know that it may be possible to sell the plant as scrap for $10 million at the end of the project (since your accountant insists the investment gets fully depreciated, you should use a "salvage value" of $0 to compute the annual depreciation expense even though you will sell the plant for $10 million at the end). How does that change your NPV analysis? 6. Suppose that Simtel currently has existing unused warehouse space. As a result of the company's growth, even without Gigantium it is expected that this unused capacity would be fully utilized by the end of year 4. Thus, Simtel is already planning to build a warehouse for $100 million in Year 4 (assume the full amount of the warehouse is spent at the end of year 4). However, if the Gigantium project is taken, the unused capacity will be fully utilized in only two years. Hence, the new warehouse would need to be built at the end of Year 2, requiring Simtel to spend the $100 million two years earlier. Regardless of when it is built, the warehouse will be depreciated over a 4 year life using the straight-line method. How does this change your NPV analysis?
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