Based on this NPV profile analysis and assuming the WACC is 20%, which project is recommended?
Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a
major renovation of the company’s manufacturing facility. The second involves replacing just a few
obsolete pieces of equipment in the facility. The company will choose one project or the other this year,
but it will not do both. The
project cash flows at 10%.
Year Renovate Replace
0 –$4,000,000 –$1,300,000
1 2,000,000 1,000,000
2 2,000,000 700,000
3 2,000,000 300,000
4 2,000,000 150,000
5 2,000,000 150,000
Based on this NPV profile analysis and assuming the WACC is 20%, which project is recommended?
Why?
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