Question
THE PAUL COMPANY IS CONSIDERING AN EXPANSION OF ITS OPERATIONS. THE EXPANSION WOULD INVOLVE THE ESTABLISHMENT OF A NEW PROCESSING PLANT. THERE ARE TWO COMPETING
THE PAUL COMPANY IS CONSIDERING AN EXPANSION OF ITS OPERATIONS. THE EXPANSION WOULD INVOLVE THE ESTABLISHMENT OF A NEW PROCESSING PLANT. THERE ARE TWO COMPETING PLANT DESIGN PROJECTS. PLANT A WOULD HAVE A USFULL LIFE OF 4 YEARS WHILE PLANT B HAS 5 YEARS. EACH OF THE PROJECTS WOULD BE CONSIDRED ONGOING IN THE SENS THAT IT WOULD BE REPLACED BY A SMILIAR PLANT AT THE END OF ITS USEFUL LIFE. THE FIRM HAS AN AFTER TAX COST OF CAPITAL 8% PER ANNUM THAT IS TO BE USED IN EVLUATING THE PROJECTSAND THE RELEVANT INCREMENTAL AFTER TAX CASH FLOWS FOR THE PROJECT ARE SHOWN BELOW. ASSUME THE CAASH FLOW AFTER THE INITILAL INVESTMENT OCCUR AT THE END OF YEAR.
EXPECTED INCREMENTAL CASH FLOW:
YEAR . PLANT A PLANT B
0 -1590,000 -1750,000
1 600,000 550,000
2 600,000 550,000
3 600,000 550,000
4. 600,000 550,000
5 550,000.
calculate npv of each project
which project should be taken in order to maximise the value of firm?
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