Question
Your company has $10,000,000 in excess cash - more than you need to provide a cushion on your balance sheet to protect against risk. Jane,
Your company has $10,000,000 in "excess cash" - more than you need to provide a cushion on your balance sheet to protect against risk. Jane, your crack financial analyst, has prepared an option for you to consider:Expand your plant capacity by 165,000 units per shift for a total capital cost of $10,000,000. You can expect an $11 after-tax contribution margin per unit and that you can run this new portion of the plant for 2 shifts for the next 15 years, at which point the equipment will need to be scrapped.Jane tells you that your tax-affected cost of capital (the appropriate discount rate to use) is 20%. Whatis the value of this option to current shareholders? Is it =: -1,765,556 or 5,981,356 or 5,809,971 or 6,971,966?
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