Question

Your company plans to spend $2,350,000 in cash to build a plant that will produce benefits with a total present value of $4,575,000. Your company already owns the land on which it will build the plant. That land was purchased with cash several years ago for $900,000, which is the current book value of the land. The land could be sold for $2,025,000 after-tax today. What is the net present value of the proposed plant?

Answer 1

Answer:

$200,000

Explanation:

Data provided in the question:

Amount willing to spend in cash to build the plant = $2,350,000

Total present value of the benefits produced = $4,575,000

Purchasing cost of the land = $900,000

Present value of the land = $2,025,000

Now,

Total present value of investment

= Amount spent to build the plant + Present value of the land

= $2,350,000 + $2,025,000

= $4,375,000

Therefore,

The net present value of the proposed plant

= Total present value of the benefits - Total present value of investment

= $4,575,000 - $4,375,000

= $200,000