# Capital Budgeting Scenario

**Topics:**Net present value, Investment, Internal rate of return

**Pages:**3 (854 words)

**Published:**April 14, 2013

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.

On the current proposal for building the new factory below will explain the analysis needed for the projection of the incremental cash flows that will be used for the NPV analysis. Building of a new factory will increase the capacity by 30% which is 3 million a year. With the estimate of profit margin at 5% this is equivalent to $150,000.00 in gross margin. At the end if the analysis the factory worth is 14 million. The net present value is computed below using the 10% average cost of capital being used for the cost of the new factory: Year| Cash Flow| PV Factor| Present Value|

0| (10,000,000)| 1.0000 | (10,000,000)|

1| 150,000 | 0.9091 | 136,364 |

2| 150,000 | 0.8264 | 123,967 |

3| 150,000 | 0.7513 | 112,697 |

4| 150,000 | 0.6830 | 102,452 |

5| 150,000 | 0.6209 | 93,138 |

6| 150,000 | 0.5645 | 84,671 |

7| 150,000 | 0.5132 | 76,974 |

8| 150,000 | 0.4665 | 69,976 |

9| 150,000 | 0.4241 | 63,615 |

10| 14,150,000 | 0.3855 | 5,455,438 |

| Net present value| (3,680,709)|

According to the following calculations the net present value for this project is negative $3,680,709. This is not a positive outcome for the company and they even may want to...

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