Acme Industries is considering several ideas for expanding its scope of operations. It is planning to open

Question:

Acme Industries is considering several ideas for expanding its scope of operations. It is planning to open an office in California to tap the Western market. Such an office would require an initial investment of $3.4 million and annual cash operating expenses of $750,000. The office, however, would generate a contribution of $1.6 million per year before considering operating expenses. Acme expects to depreciate (using a straight-line basis) the assets over an eight-year period. At the end of eight years, Acme expects to sell the California office for $400,000. Acme pays taxes at the rate of 30% of income and uses a of 10% on its capital projects.

Required:
a. Calculate the (NPV) and the (IRR) for the California office. Based on these criteria, should Acme open the office in California?
b. What would be the for this project?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...