Capital Budgeting

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Considering the information for the Proposal concerning the building of the new factory, the incremental cash flows are needed for the NPV analysis

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FIN 486 Week 4 Individual Assignment Capital BudgetingCapital BudgetingDerwin BrownFIN/48612/15/2014Rosa Welton, InstructorCapital BudgetingConsidering the information for the Proposal concerning the building of the new factory, the incremental cash flows are needed for the NPV analysis. The incremental cash flows are sales of $3 million a year which equals an increase in gross margin by $150,000 given a 5% gross margin and initial on investment of $10 million which is the cost of building the new factory. The savage value at the end of the project life will be $14 million. Given a 10% weighted average cost of capital, the following table shows the net present value that is computed for this project. YearCash FlowPV FactorPresent Value0(10,000,000)1.0000 (10,000,000)1150,000 0.9091 136,364 2150,000 0.8264 123,967 3150,000 0.7513 112,697 4150,000 0.6830 102,452 5150,000 0.6209 93,138 6150,000 0.5645 84,671 7150,000 0.5132 76,974 8150,000 0.4665 69,976 9150,000 0.4241 63,615 14,150,000 0.3855 5,455,438 Net present value(3,680,709)As shown in the present value table, the NPV of the capital project is $3,680,709 on the negative side which means the project will result in the decrease in the wealth of the companys stockholders, resulting in violation of the wealth maximization concept. The analysis as per the proposal was done for 10years which is the expected economic life of the new factory. At the end of the e

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