On Monday morning you get an email from your company CFO asking to help her$/$him with an NPV calculation. The CEO and production manager are considering an investment to expand the company's production capacity. They wish to invest in a new production facility in which the company can manufacture, assemble and package what has been produced for delivery. They asked the CFO $($who decided to pass the buck to you$)$ to calculate the Net Present Value $($NPV$)$ and make the decision IF to invest.

You are offered the following basis for calculation:

$$ Economic lifetime for the production plant is calculated at $5$ years.

$$ Sales of $1$ million products per year.

$$ Each product is sold at a price of SEK $3\mathrm{.}50$ per piece.

$$ Material costs on average SEK $1\mathrm{.}20$ per piece.

$$ Salary costs for staff amount to SEK $1\mathrm{.}5$ million annually regardless of production volume.

$$ The company's WACC is $10\%.$

Calculate the Net Present Value $($NPV$)$ and decide IF you give the CEO a go$-$ahead to do the investment given that the production facility costs SEK $3\mathrm{.}2$ million in basic investment but is estimated to have a salvage value of SEK $300,000$ in $5$ years?

 

Answer rating: 100% (QA)

ANSWER To calculate the Net Present Value NPV of the investment in the production facility well foll... View the full answer