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ASSIGNMENT # 1 A company is considering building a new and improved production facility for one of its existing products. It would be built on
ASSIGNMENT #
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 $; it has a current market value
of $ The building can be erected for $ Machinery equipment worth
$ needs to be bought. The company will finance the construction of the building
and the purchase of the equipment by borrowing $ for years at interest.
Interest will be paid annually and the full amount of the loan will be repaid in one
payment at the end of the years. The company's net working capital will increase
by $ if the new production facility is built. Operating savings from the new
production facility are expected to be $ per year for the next years. The
total fair market value salvage value of the assets at the end of the years is
expected to be $ of which is attributable to the building and equipment.
The building and equipment will be amortizeddepreciated on a straightline basis over
years. The firm's tax rate is percent and the CCA rate is The firm's
weighted average cost of capital WACC is estimated at percent. Should the
company build the new and improved production facility? Round final dollar
amounts in each category to the closest dollar ie ignore cents
NOTE: Although not realistic, the question assumes that the construction of the
building will be completed "immediately". Thus, the operating savings are realized
starting Year
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