Reference no: EM133010861

Joe Nix has been the Chief Financial Officer (CFO) for Ace Manufacturing for nearly 20 years. Ace Manufacturing owns the factory building that houses its operations, but the company's production levels are nearing maximum capacity for the factory building's size. The company is considering expanding and possibly constructing a new larger factory building to house all of its operations. Construction of the new factory building is expected to cost $1,000,000, and the building is expected to have a 14-year life. Roger Stone, the company's Chief Executive Officer (CEO), has asked Joe to "run the numbers" and come up with a recommendation for approval or rejection of the expansion project to be presented to the company's board of directors. Roger reminds Joe that the company must have a rate of return of at least 6% on any investment. After carefully analyzing the numbers, Joe estimates that the expansion project could produce maximum additional future annual net cash flows of $100,000.

The present value factors from the Present Value of an Annuity of $1 Table for 14 periods are as follows:

Periods            4%                  5%             6%             7%
14                10.5631        9.8986        9.2950      8.7455

REQUIRED:

Problem 1: Calculate the Net Present Value (NPV) of the expansion project. Assume that the factory building will have no salvage value. Show all of your calculations.

Problem 2: Calculate the Internal Rate of Return (IRR) for the expansion project. Show all of your calculation.

Problem 3: Based on the results of your NPV and IRR calculations above, should Joe recommend approval or rejection of the expansion project? Provide explanations for your answer.