Your firm is examining the viability of a capital investment project that will use excess capacity in the current packaging plant. As a consequence of the project using up the excess capacity, your firm anticipates having to spend $5.0 million on a new packaging plant at the end of 3 years from today rather than $6.0 million at the end of 5 years from today as originally planned. Assume the plant would be depreciated for tax purposes on a straight-line basis over five years, and the corporate income tax rate is 40%. Using a weighted average cost of capital of 14%, what is your best estimate of the incremental effect in net present value terms of this “excess capacity” issue? Show all your work.
The question belongs to Finance and it discusses about choosing between two investment options.
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