Explain the three value maximization decisions (answer attached)

Explain the three value maximization decisions

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After taking a closer look at the numbers and doing the financial analysis, you begin to think more strategically, and in a broader context, you anticipate what the CFO would ask or what the head of Strategic Planning might want to know. You think about some of the key issues:

 

(The Project)

Acquisition of a new production plant that the company will lease for 5 years at US$1,500,000 per year; it will cost the firm US$4,000,000 in capital (straight-line depreciation, 5 year life) in year 0; it will cost the firm an additional US$150,000 per year after the new production plant is brought online for other expenses; and it will generate an incremental revenue of US$3,500,000 per year. Use a 40% tax rate, a 10% cost of capital, and a 12% re-investment rate. Assume the company will use cash flow to finance the project.

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Does this project maximize firm value?

What will be the impact to the stock price?

How does this capital project fit with the strategic direction of the firm?

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