A company is considering two competing investments. The first is for a standard piece of production equipment;
Assume that the companys cost of capital is 14 percent.
1. Calculate the NPVof each alternative by using the 14 percent rate.
2. Now assume that if the standard equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did automate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50 percent for years 3 through 10. Recalculate the NPVof the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangiblebenefits.
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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