Exam 6: Making Capital Investment Decisions

Net Present Value is the only method of investment appraisal that

Two years ago Red Bricks Ltd. bought a parcel of land for $200,000 and spent $40,000 laying a foundation for a new factory. Work was stopped because of a recession. Now that the economy has improved, Red Bricks is considering starting the expansion again. The latest numbers suggest it can complete construction using 1 million of its own bricks that cost $0.50 to make but could have been sold for $0.75 each. The company could use 10 of its own idle workers for 40 hours per week for 10 weeks, each earning $15 per hour. These workers would not be laid off if the firm decides against expansion. In addition, another 20 new hires would have to be done for the same period, but these employees would only earn $10 per hour. New machines costing $5,000,000 would be purchased. The new factory is expected to produce $2,000,000 cash flow per year for 10 years. What is the net present value of the project if Red Brick's hurdle rate is 14%?

Fandango Company limited is considering purchasing one of three warehouse data management systems. The initial capital investment for System 1 is $9 million and improvements to net income before depreciation are estimated at being $500,000, $2.5 million and $3.5 million in the first three years and $5 million for the remaining system lifetime of six years. System 2, costing $10 million will yield income improvements of $1.5 million and $3.5 million in the first two years and $5 million for the remaining six years. System 3 costs $12 million and provides savings of $2 million, $3 million, and $4 million in the first three years and $5 million thereafter for six years. The best alternative judging by the payback method of investment appraisal is

When evaluating investment opportunities for a company, what is the best discount rate to use?