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1) Company is thinking of building new and improved production facility for one of its existing products. It would be constructed on piece of empty land which the firm owns. This land was obtained 4 years ago at a cost of= $500,000; it has a present market value of= $800,000. Building can be erected for= $600,000. Machinery (equipment) value of= $120,000 requires to be bought. Company will finance construction of building and purchase of equipment by borrowing= $720,000 for ten years at 10% interest. Interest will be paid yearly and full amount of loan will be repaid in 1 payment at the ending of ten years. Company’s net working capital will rise by= $100,000 if new production facility is constructed. Operating savings from new production facility are expected to be= $300,000 per year for next ten years. Total salvage value at the ending of the ten years is expected to be= $1,000,000- one quarter of which is attributable to building and equipment. Building and equipment will be amortized on the straight-line basis over ten years. Firm’s tax rate is 40% and CCA will be taken on all depreciable assets at the rate of 20%. Firm’s weighted average cost of capital (WACC) is evaluated at 15%. Should company construct new and enhanced production facility?

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