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Problem1. You have an opportunity to purchase the Newton Falls Paper mill for $15 million. If you purchase the facility your plan is to produce one or more specialty papers where you think the margins are higher. You would also like to modernize and update the mill. To do this you will have to buy two new paper machines for $1.5 million each and a new computer system for another $1 million.

You anticipate revenues to be:

i) $6 million year 1
ii) $8 million year 2
iii) $9 million year 3 and ongoing

You anticipate your variable costs to equal 20% or revenues and your fixed costs to equal $4.5 million (depreciation expenditure is not comprised in this estimate of fixed costs). The cost of equity is 11.64%. Suppose a tax rate of 35%.

problem1. Should you purchase the mill and implement your plan of manufacturing different paper? What is NPV?

Financial Accounting, Accounting

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