Question

PRINTER VERSION BACK NEXT Problem 10.16 a-b (Solution Video) Ivanhoe Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 14.82 percent for such projects. Production Capacity Year Product Line Expansion "Expansion -$2,287,900 -$7,327,100 461,200 2,583,900 993,900 2,583,900 993,900 2,583,900 993,900 3,978,100 993,900 3,978,100 a. What are the NPVs of the two projects? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to O decimal places, e.g. 1,525.) NPV of product line expansion is $ NPV of production capacity expansion is b. Should both projects be accepted? or either? or neither? Explain your reasoning. Ivanhoe should accer Click if you would I only the product line expansion only the production capacity expansion neither project both projects en Show Work

Answer 1

The NPV for Product line expansion is :

($2,287,900 ) + $4,612,00/ 1.1482 + $99,3900/1.1482^2 + $99,3900/1.1482^3 + $99,3900/1.1482^4 + $99,3900/1.1482^5

NPV = $5,94,111.926

= $5,94,112 (rounded off to zero decimal places)

Similarly, the NPV for Production capacity expansion is :

NPV = $2,882,027 (rounded off to zero decimal places)

Since, the NPV of both the projects is positive and both the projects are independent projects so both project should be accepted. So, the correct option is option 4.