Question 24 4 pts TeleStark is considering building a new manufacturing plant. T

Question

Question 24 4 pts TeleStark is considering building a new manufacturing plant. This plant will cost $8 million to build. The new plant will produce cash inflows of $1 million per year for the next 14 years. TeleStark already owns the land on which it intends to build the new plant. TeleStark spent $0.8 million to excavate the land and prepare it for development. Rather than building the plant. TeleStark could sell the land for $2.5 million. If TeleStark's required return is 6.2%, should it build the plant? How much value does this project create (or destroy) in today's (time 0) dollars? O Yes, creates $0.38 mil O Yes, creates $0.17 mil O No. destroys $1.32 mil No, destroys $2.12 mill

Explanation / Answer

Select - Option - 4 ......... No, destroys $ 2.12 million

Explanation

Firstly compute relevant cashflows at t= 0

Now calculate the present value of cash inflows for 14 years at 6.2%

= 1 million * [ 1 - (1.062)14 ] / 0.062 = 9.18 million

Hence NPV = 9.18 - 11.3 = - 2.12 Millions

Replacement value of land 2.5 Excavate the land 0.8 Cost of plant 8 Total Investment 11.3

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