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 Calculate the net present value (NPV) of each project and based on this criterion, indicate which project you would recommend for acceptance.
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
Calculate the
project you would recommend for acceptance.
In order to choose one of alternatives, we will have to calculate the net present value of each alternative. The alternative with highest Net Present Value will be selected.
Net Present Value is calculated by pulling all future cash flows using a cost of capital (Required Rate of Return) to the present.
Refer step 2 for the detailed analysis.
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