Question
Breakeven cash inflows and risk. Bomark Fabrics is a manufacturer of luxury wool fabrics. The officers of the company are considering building a new production
Breakeven cash inflows and risk. Bomark Fabrics is a manufacturer of luxury wool fabrics. The officers of the company are considering building a new production facility in North Carolina. The architect has suggested two different options, the Standard or the Custom. The Standard plant will cost $12,000,000 to build. The Custom plant will cost $20,000,000 to build. Both plants would have a useful life of 10 years.
The Custom plant will allow Bomark the ability to create specialty fabrics not only in wool, but also in cotton and synthetic. Bomark projects to generate revenue of $1,750,000 a year from the Standard plant. If Bomark spends more to build the Custom plant, revenue is projected at $3,000,000.
Bomark has the funds to build either plant (but not enough to build both). The company is determined to choose the plant design with the highest NPV. Bomarks cost of capital is 7.5%,.
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