Quantitative factors - numerical questions (2)
The manager of O'Neill Biochemical Ltd is considering relocation of the processing facilities. He has narrowed down the choices to two options. Data relevant for this decision is as follows:
This location is in Michigan and, although a cheaper option, there would be higher operating costs due to the higher wages that would need to be offered to recruit suitable workers. The capital cost of plant A is $5 million.
This location is in Houston would be very near transport links, which would save the firm money, but the site is relatively expensive. The capital cost of plant B is $10 million.
Forecast information for each of the plants was produced as follows:
|Location A||Location A||Location B||Location B|
|Revenue receipts||Operating payments||Revenue receipts||Operating payments|
|$ million||$ million||$ million||$ million|
- A modification to the plant at location B to treat the pollution would need an extra capital cost of $2 million. In addition, operating payments would increase in each year by $400,000.
- The company's cost of capital is 10% per annum.
- The following extract is from the present value table for $1 at 10% per annum.
Produce net present value calculations for the locations A and B. For Location B provide figures both for the plant in its basic form and also with the modifications to treat pollution.
Flanders Ltd is trying to decide which project should be taken up, out of three possible investments. The initial investment would amount to $40,000. Scrap value at the end of use would be nil.
The cost of capital is 9%, for which discount factors are as follows:
|Year||Present value of $1|
The net cash inflows from the three projects under consideration are:
For each possible project you are required to calculate:
(ii) Net present value