Yuki, the finance manager of Firm A, is analyzing the following business case.

Firm A maintains a production plant which generates a cash flow income of 580 million per annum. However, the plant is outdated and there is risk that the outputs of the plant cannot meet customer needs in 2 years. After 2 years, the plant is expected to be sold at 50 million after tax

Now, the management of Firm A is considered to upgrade the plant. The upgrade cost is 3800 million upfront. After the upgrade, the production plan can generate an income of 850 million per annum for the coming 10 years. After 10-year operation, the plant would be sold at a script value of 80 million.

The WACC of Firm A is 12%. For the replacement project:

a. Should the 580 million income from the original plant be considered in the project and how? Why? (5%)

b. What is the NPV for the replacement project? (15%)

Answer rating: 100% (QA)

Lets analyze the replacement project for Firm A a Consideration of the 580 million income from the o... View the full answer