A company is looking to buy a manufacturing warehouse that will allow them to produce candles. The
Question:
A company is looking to buy a manufacturing warehouse that will allow them to produce candles. The warehouse will produce the following production schedule for candles and will sell the candles for $25 each. Y0 Y1 Y2 Y3 Y4 Y5 Candle Units 550,000 555,000 566,000 566,500 557,000 4 Each candle will cost approximately $15 each to make and the operating cost of the warehouse is $125,000 per year. There are no other costs associated with the warehouse. Depreciation is computed on a straight-line method, and the warehouse has an expected value of $125 million. We will sell the warehouse in year 5 for $100 million (ignore taxes on sale). To start the production of candles we need to make a 1 million dollar investment in working capital. The tax rate is 35%. (hint: see the report example on e-Campus) First step: Compute the Free-Cash-Flows on this investment (F CF = EBIT ? (1 ? t) + D&A ? CAP EX ? ?NOW C) Second step: Compute the NPV given a WACC of 10%. (=NPV( ), in excel) Should the company make the investment?
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Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling