Using Net Present Value (NPV), determine the proposal's appropriateness and economic viability.
Answer the following in your report:
• Apply calculations to determine the proposal's appropriateness and economic viability.
• Explain the effect of a higher or lower cost of capital on a firm's long-term financial decisions.
• Analyze the use of capital budgeting techniques in strategic financial management.
Determine the proposal's appropriateness and economic viability. Assume spending occurs on the first day of each year and benefits or savings occurs on the last day. Assume the discount rate or weighted average cost of capital is 10%. Ignore taxes and depreciation.
Proposal: New Equipment
A company wants to buy a labor-saving piece of equipment. Using the NPV method of capital budgeting, determine the proposal's appropriateness and economic viability with the following information:
• Labor content is 12% of sales, which are annually $10 million.
• The new equipment will save 20% of labor annually.
• The new equipment will last 5 years.
• The new equipment will cost $200,000.