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Chantilly Natural Snacks is contemplating an expansion. The finance manager is looking at buying a second machine that would cost $ 7 0 comma 0
Chantilly Natural Snacks is contemplating an expansion. The finance manager is looking at buying a second machine that would cost $ comma and last for years with no disposal value at the end of that time. Chantilly expects the increase in cash revenues from the expansion at $ comma per year, with additional annual cash costs of $ comma Chantillys cost of capital is and the company pays no taxes because of its location in a special economic zone.
Calculate the net present value and internal rate of return for this investment.
Assume the finance manager of Chantilly is unsure about the cash revenues and costs. The revenues could be anywhere from higher to lower than predicted. Assume cash costs are still $ comma per year. What are NPV and IRR at the high and low points for revenue?
The finance manager thinks that costs will vary with revenues, and if the revenues are higher, the costs will be higher. If the revenues are lower, the costs will be lower. Recalculate the NPV and IRR at the high and low revenue points with this new cost information.
The finance manager has decided that the company should earn more than the cost of capital on any project. Recalculate the original NPV in requirement using the new discount rate and evaluate the investment opportunity.
Discuss how the changes in assumptions have affected the decision to expand.
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