Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

The Peach Company is thinking of building a new plant to put the peaches it grows into cans. The plant is expected to last for 20 years. Its initial cost is $20 mln. This cost can be depreciated over the full 20-year of the plant using straight line depreciation. It will require a major renovation which will cost $8 mln in real terms after 10 years. This cost of renovation can be depreciated (again using straight line depreciation) over the remaining 10 years of the plan's life. The land the plant is built on could be rented out for $500 000 a year in nominal terms for twenty years. The salvage value of the plant at the end of the twenty years is $3.5 mln in nominal terms. This salvage value is attributed to t he original expenditure on the plant for tax purposes. There is no salvage value with regard to the renovation.

The plant could be able to produce 50 mln cans of peaches a year. The price of a can of peaches is currently $0.50. It is expected to grow at a rate of 3% per year in real terms for 6 years and then at 0% in real terms for the reminder of the plant's life. The firm expects to be able to sell all the cans of peaches it can produce. The peaches the firm puts in the cans are grown in the firm's own orchards. If the peaches were not canned they could be sold to supermarkets. The current price they could obtain per peach is $0.1. This price is expected to grow at a rate of 2% in real terms for 5 years and then at 1% in real terms for the next five years and finally at 0% in real terms for the reminder of the plant's life. Each can requires 2.5 peaches to fill it. The raw materials for the cans currently cost $0.05per can. These costs are expected to remain constant in real terms. The labor required to operate the plant costs a total of $5 mln a year in real terms. Initially, the total working capital requirement is $10mln and this is expected to remain constant in real terms.

The rate of inflation is expected to be 4% per year for the next four years and 3% per year for the remainder of the plant's life. The firm's total tax rate including local taxes is 38 per cent. The firm expects to make substantial profits on its other operations so that if it can offset any losses on the peach canning plant for tax purposes. Its opportunity cost of capital for projects of this type is 14% in nominal terms.

Construct two spreadsheets in EXCEL to find the NPV of the peach canning plant. One spreadsheet should be in nominal terms and the other should be in real terms. The value of the real and nominal NPVs should be the same. Should the firm build the plant?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M925291

Have any Question? 


Related Questions in Basic Finance

1 explain the rationale behind time series designs2

1. Explain the rationale behind time series designs. 2. Describe the simple interrupted time series design. 3. Why is contemporary history a threat to internal validity in a simple interrupted time series design?

Use the value of the linear correlation coefficient to

Use the value of the linear correlation coefficient to calculate the coefficient of determination. What does this tell you about the explained variation of the data about the regression line? About the unexplained variat ...

One historian has given the following description of the

One historian has given the following description of the economy of the Roman Empire in the third century under the emperor Diocletian: The coinage had become so debased as to be virtually worthless. Diocletian's attempt ...

Briefly explain whether you agree with the following

Briefly explain whether you agree with the following statements: a. "A bank that expects interest rates to increase in the future will want to hold more rate-sensitive assets and fewer rate-sensitive liabilities." b. "A ...

Craigs manufacturing company is considering the purchase of

Craig's Manufacturing Company is considering the purchase of a new machine for a cost of$250,000. The new machine will have a 5-year useful life and will be depreciated to anexpected salvage value of zero using the strai ...

1 what assumption about the future composite rate of

1. What assumption about the future composite rate of interest on an adjustable rate mortgage is made when determining the APR for federal truth-in-lending disclosures? 2. List the closing cost items which require RESPA ...

1 what are some of the physical considerations that a

1. What are some of the physical considerations that a developer should be concerned with when purchasing land? How should such considerations be taken into account when determining the price that should be paid? 2. What ...

A thin film 10 mm thick coat of fresh paint has just been

A thin film, 1.0 mm thick, coat of fresh paint has just been sprayed over a 1.5 m by 1.5 m square steel body part, which approximates a flat surface. The paint contains benzene as the solvent. The paint surface exerts a ...

1 using the internet the library or another information

1. Using the Internet, the library, or another information source, print out three different articles that describe the same disaster event. Compare the three articles to determine which provides the most useful informat ...

Compare and contrast the fixed exchange rate free floating

Compare and contrast the fixed exchange rate, free floating, and managed floating systems? How can central banks use direct intervention to move the value of a currency? List and discuss the advantages and disadvantages ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen