Proposal A: New FactoryA company wants to build a new factory for increased capacity. Using the net...

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Proposal A: New FactoryA company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:• Building a new factory will increase capacity by 30%.• The current capacity is $10 million of sales with a 5% profit margin.• The factory costs $10 million to build.• The new capacity will meet the company’s needs for 10 years.• The factory is worth $14 million over 10 years. Using net present value, determine the proposal’s appropriateness and economic viability.Prepare a 500-word report explaining your calculations and conclusions. Answer the following in your report:• 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.Format your report consistent with APA guidelines.
	
Document Preview: Proposal A: New FactoryA company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:•	Building a new factory will increase capacity by 30%.•	The current capacity is $10 million of sales with a 5% profit margin.•	The factory costs $10 million to build.•	The new capacity will meet the company’s needs for 10 years.•	The factory is worth $14 million over 10 years. Using net present value, determine the proposal’s appropriateness and economic viability. Prepare a 500-word report explaining your calculations and conclusions. Answer the following in your report:•	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.Format your report consistent with APA guidelines.

David · Accepted Answer

Report Evaluating Proposal A: New Factory 
The given case is related to a company which is considering building a new factory for 
increased capacity. The net present value technique is required to be used for determining the 
appropriateness and economic viability of proposal. The net present value technique and 
calculations are explained below: 
Net Present Value 
The best method to evaluate a Capital Budgeting proposal is the Net Present Value 
method or discounted Cash Flow method. The word “net” in this term indicates that entire cash 
flows-positive or negative are considered. This method takes into account the concept of time 
value of money. The net present value of an investment proposal may be defined as the sum of 
present value of all cash inflows less present value of all cash outflows associated with the 
proposal. This method is in accordance to the concept of creation of shareholders’ wealth. It 
helps in easy comparison as net present value of different projects can be compared with one 
another. The formula for calculating net present value is given as follows: 
Net Present Value = Present Value of Cash Inflows – Present Value of Cash Outflows 
Calculations of Proposal 
The cash outflow and cash inflow involved in Proposal A: New Factory is given as follows: 
Life of Proposal = 10 years 
Initial Investment (zero period) = $10 million 
Salvage Value after 10 years = $14 million 
Increase in profit due to new factory = $10 million * 30% * 5% 
Increase in profit due to new factory = $0.15 million or $150,000 
Now the present value is required to be calculated. For calculating present value, discount rate is 
needed. Since discount rate is not given in question, it is presumed as 10%.  
Present Value of Cash Inflows and Cash Outflows are calculated as follows: 
Present Value of Initial Investment = $10 million * Present Value Factor (10%,

Proposal A: New Factory A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and...

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