I'm in great need of help with a finance problem.
You are a small business owner and you have the opportunity to expand your facility, which will increase your production capacity over the next 5 years. The expansion will cost $60,000 and additional equipment will cost another $20,000.
Required:
Additional profits after tax will amount to $18,000 per year. Your cost of capital is 8%. Should you go ahead with the expansion? Hint: Use NPV.
I know the total cash outflows will be $80,000. But I am confused on the rest. Please help me. Thanks in advance.
1 answer
NPV = -initial investment(outflows) + (cash inflow/(1 + rate)^Year)) and so on for period of time calculating for. In this case, it would be -$80,000 + ($18,000/(1+.08)) + ($18,000/(1+.08)^2) + ($18,000/(1+.08)^3) + ($18,000/(1+.08)^4) + ($18,000/(1+.08)^5). Calculate this out and if the NPV is positive, the project should go ahead. If it is negative, it should not. These calculations can also be done in Excel using NPV function.
1 answer