Puffy Clouds, a maker of data storage products, is considering adding a new manufacturingfacility. The new facility would be housed in an unused building that the firm bought 8 yearsago for $600,000 and could be sold today for $2 million. The new facility would require thepurchase of $50 million of equipment that would be depreciated straight line to a zerosalvage value over a useful life of 5 years. However, the firm expects this equipment wouldhave a scrap value of $250,000 at the end of its 5-year life. The firm would finance theequipment purchase with a five-year debt issue that would carry an interest rate of 5% p.a.The new facility would add $20 million to annual revenues, which are currently $100 millionper year. The higher manufacturing efficiency of the new facility would reduce annualoperating costs from 40% of revenues to 35% for both existing and new sales revenues. Thenew facility would require a $500,000 increase in net working capital, which would berecovered at the end of the project. The firm's tax rate is 21% and the required rate of returnis 8%. Calculate the NPV and IRR for the new facility?

Answer rating: 100% (QA)

answer The 5 million cost of the land 8 years ago is a sunk cost and irrelevant The 2 mill... View the full answer