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The following question has multiple parts. It is 2021 and your firm is considering expanding its operations by building a new manufacturing facility. If you
The following question has multiple parts. It is 2021 and your firm is considering expanding its operations by building a new manufacturing facility. If you choose to proceed, the facility will take two years to construct and will commence operations in the third year. For our purposes, we will recognize all relevant cash flows at the end of the year during which they take place. Once the facility commences operations, it is expected to generate revenues of $825,000 in its first year, with associated expenses of $300,000. Each subsequent year, revenues are expected to increase by 2% per year, while associated expenses are anticipated to grow by 5% per year. You plan on operating the factory as long as it generates positive cash flow from operations (as long as revenues exceed associated expenses). Your firm uses an interest rate of 6% when evaluating potential projects such as this. Question 1: What is the revenue amount generated from this new manufacturing facility in its 10th year of operations? $ (please provide your answer rounded to the nearest dollar) Question 2: What is the present value today of the revenue stream that this new plant is anticipated to produce? $(please provide your answer rounded to the nearest dollar) Question 3: What is the present value today of the stream of associated expenses that this new plant is anticipated to incur? $ (please provide your answer rounded to the nearest dollar) Question 4: If it is going to cost $4,200,000 to build the new factory, what is the net present value (NPV) of this opportunity? You may assume that this cost is payable today, at t=0. $(please provide your answer rounded to the nearest dollar)
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