Question
Joe Nix has been the Chief Financial Officer (CFO) for Ace Manufacturing for nearly 20 years. Ace Manufacturing owns the factory building that houses its
Joe Nix has been the Chief Financial Officer (CFO) for Ace Manufacturing for nearly 20 years. Ace Manufacturing owns the factory building that houses its operations, but the companys production levels are nearing maximum capacity for the factory buildings size. The company is considering expanding and possibly constructing a new larger factory building to house all of its operations. Construction of the new factory building is expected to cost $1,000,000, and the building is expected to have a 14-year life. Roger Stone, the companys Chief Executive Officer (CEO), has asked Joe to run the numbers and come up with a recommendation for approval or rejection of the expansion project to be presented to the companys board of directors. Roger reminds Joe that the company must have a rate of return of at least 6% on any investment. After carefully analyzing the numbers, Joe estimates that the expansion project could produce maximum additional future annual net cash flows of $100,000. The present value factors from the Present Value of an Annuity of $1 Table for 14 periods are as follows:
Periods 4% 5% 6% 7%
14 10.5631 9.8986 9.2950 8.7455
REQUIRED:
4. Joes sister, Beth Harding, has just started up a new construction company that specializes in the construction of commercial buildings. Joe is extremely eager to see his sisters company get off the ground and become successful. Two years ago, Beths husband, Tim, was severely injured during combat while serving with the United States Army and is totally and permanently disabled as a result of his injuries. Since Tims injury, Beth has become very involved with the Wounded Warrior Project, serving as Chairman for the charitable organizations local chapter. She is also involved with several other charities in the area that provide food and other necessities to the homeless. Beth has pledged to donate 15% of the net profits from her construction business to charity. Joe knows that a $1,000,000 construction project could be life-changing for Beths new company, Beths family, and countless individuals impacted by the charitable organizations Beth is involved with. Joe could easily (and discreetly) increase the estimated future annual net cash flows by a small amount (approximately $8,000) and change the results of the calculations supporting a different recommendation to Ace Manufacturings board of directors. Explain why Joe should or should not consider doing this. Your explanation should be one-half page to one page long (double-spaced) and should include adequate reasoning supporting your conclusion after considering all of the circumstances.
Net Present Value (NPV) ) NPV (Expansion Linject) Presint value of Cash Oat fiocu (puco) = 37,000,000 (s) - $1,000,000 Present value of cash inflow (PVCD) por cash infocus/yr *PV of 14 yrs en -$100,000 (9.2950) = 5929,500 NPV = PUCE-PVCO = 5929,500 - 1,600,000 = $10,500) z) Internal Rate of Return (Tel) (Expansion Project) IR2= 2% PVCO = 1,000,000, PVCI = 8100,000 PUCF) (2%, 14 years) $100,000 (PvF)(2%, 14 years) - 54000,000 PUF (23, 14 years) = 51,000,000 15160,000 10 PU Tables: 2-5% puF for 14 periods - 9.8936 NPV = (989,860 -1,000,000)=160,140) R=4%, PVF for 14 periods = 10.563/ Apvz' (1,056,310 -1,000,000) 556,310 RiE Lower interest rate RZ Higher interest ante, NP VI - Higher net present value (NPV), Nevz = lower Nev IRR=R1+(NPVI-CR2-RI)/NPVNPV2) = 4 +(56,310-(3-4)/656, 310-(10,140)) = 4 +0.8474 TRR: 4.8474% Based on NPV & IRR, Joe should reject the expansion project, because Project NPV is negative *TPR) current financing cost Do not consideradoceant rates compared to the market Net Present Value (NPV) ) NPV (Expansion Linject) Presint value of Cash Oat fiocu (puco) = 37,000,000 (s) - $1,000,000 Present value of cash inflow (PVCD) por cash infocus/yr *PV of 14 yrs en -$100,000 (9.2950) = 5929,500 NPV = PUCE-PVCO = 5929,500 - 1,600,000 = $10,500) z) Internal Rate of Return (Tel) (Expansion Project) IR2= 2% PVCO = 1,000,000, PVCI = 8100,000 PUCF) (2%, 14 years) $100,000 (PvF)(2%, 14 years) - 54000,000 PUF (23, 14 years) = 51,000,000 15160,000 10 PU Tables: 2-5% puF for 14 periods - 9.8936 NPV = (989,860 -1,000,000)=160,140) R=4%, PVF for 14 periods = 10.563/ Apvz' (1,056,310 -1,000,000) 556,310 RiE Lower interest rate RZ Higher interest ante, NP VI - Higher net present value (NPV), Nevz = lower Nev IRR=R1+(NPVI-CR2-RI)/NPVNPV2) = 4 +(56,310-(3-4)/656, 310-(10,140)) = 4 +0.8474 TRR: 4.8474% Based on NPV & IRR, Joe should reject the expansion project, because Project NPV is negative *TPR) current financing cost Do not consideradoceant rates compared to the marketStep by Step Solution
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