uicy Candy Company is considering expanding by buying a new​ (additional) machine that costs $115,000​, has zero terminal disposal​ value, and has an 8​-year useful life. The company expects the annual increase in cash revenues from the expansion to be $61,000 per year. It expects additional annual cash costs to be $40,000 per year. Its cost of capital is 6​%. Ignore taxes REQUIRED     1. The finance manager has decided that the company should earn 2​% more than the cost of capital on any project. Recalculate the original NPV in requirement 1 using the new discount rate and evaluate the investment opportunity. 2. Discuss how the changes in assumptions have affected the decision to expand

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Juicy Candy Company is considering expanding by buying a new​ (additional) machine that costs $115,000​, has zero terminal disposal​ value, and has an 8​-year useful life. The company expects the annual increase in cash revenues from the expansion to be $61,000 per year. It expects additional annual cash costs to be $40,000 per year. Its cost of capital is 6​%. Ignore taxes

REQUIRED

   

1.

The finance manager has decided that the company should earn 2​% more than the cost of capital on any project. Recalculate the original NPV in requirement 1 using the new discount rate and evaluate the investment opportunity.

2.

Discuss how the changes in assumptions have affected the decision to expand.

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