Peel Ltd. is considering an expansion of their production capacity. The company has asked you to evaluate whether the project should be undertaken. To help with your analysis, management has provided you with the following information: The project will require an initial investment of $2 million in a new factory. The company has adopted a 5- year planning horizon, after which it intends to re-evaluate the investment. The factory will be built on a block of land that is being purchased for $1 million. Land values are projected to grow at an average rate of 3% per annum for the foreseeable future. The project will also require an additional investment of $ 700,000 in net working capital. Based on a marketing study conducted at a cost of $80,000 net revenues have been projected at $1,900,000 per annum over the five-year period. Finally, the factory is expected to have a salvage value of $900,000 at the end of the project and the analysis is to be undertaken on the assumption that the land and the factory will all be sold at the end of the project. The firm's tax rate is 40 %, its cost of capital is 15% and the CCA rate to be used for the factory is 30%.
Peel Ltd. is considering an expansion of their production capacity. The company has asked you to evaluate whether the project should be undertaken. To help with your analysis, management has provided you with the following information: The project will require an initial investment of $2 million in a new factory. The company has adopted a 5- year planning horizon, after which it intends to re-evaluate the investment. The factory will be built on a block of land that is being purchased for $1 million. Land values are projected to grow at an average rate of 3% per annum for the foreseeable future. The project will also require an additional investment of $ 700,000 in net working capital. Based on a marketing study conducted at a cost of $80,000 net revenues have been projected at $1,900,000 per annum over the five-year period. Finally, the factory is expected to have a salvage value of $900,000 at the end of the project and the analysis is to be undertaken on the assumption that the land and the factory will all be sold at the end of the project. The firm's tax rate is 40 %, its cost of capital is 15% and the CCA rate to be used for the factory is 30%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
am. 137.
Transcribed Image Text:Peel Ltd. is considering an expansion of their production capacity. The company has asked you to
evaluate whether the project should be undertaken. To help with your analysis, management has
provided you with the following information:
The project will require an initial investment of $2 million in a new factory. The company has adopted a 5-
year planning horizon, after which it intends to re-evaluate the investment. The factory will be built on a
block of land that is being purchased for $1 million. Land values are projected to grow at an average rate
of 3% per annum for the foreseeable future. The project will also require an additional investment of $
700,000 in net working capital. Based on a marketing study conducted at a cost of $80,000 net revenues
have been projected at $1,900,000 per annum over the five-year period.
Finally, the factory is expected to have a salvage value of $900,000 at the end of the project and the
analysis is to be undertaken on the assumption that the land and the factory will all be sold at the end of
the project. The firm's tax rate is 40 %, its cost of capital is 15% and the CCA rate to be used for the
factory is 30%.
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