Bob’s Big Belly (BBB) has asked you to make a recommendation for an investment proposal they have been looking at and trying to decide on. The investment is for new factory to manufacture a new tool with a total cost of $7,400,000 including $100,000 for permits. BBB is also planning to throw a big celebration if the investment is successful for $20,000. This new tool will require an increase in inventory of $100,000 from day one of the proposal. All other assets of the company are remaining the same. Sales of this new tool will be

$10,000,000 per year with COGS estimated at 65% of sales. All other expenses are staying the same as before. BBB WACC is 14%, it’s cost of borrowing is 9% and their marginal tax rate is 25%. The new factory will have a CCA rate of 30% and there will be other assets in this class when the project ends in five years. The salvage value of the factory will be $400,000 in five years. Assume the risk profile of the proposal is the same risk profile of BBB.

Required

Based on the NPV method, should BBB go ahead with the new factory? Round all dollar amounts to the nearest dollar. Show all your work, including any schedules and calculations

Answer rating: 100% (QA)

As per question requirements only npv is required ... View the full answer