Pitts Industrial is planning to undertake a second line of business. With the new line of business, the firm will need to pay for an expansion of its distribution system earlier than it had initially planned. The current cost (in $ thousands) of expanding the capacity of its distribution system is $240 million and the cost of expanding the distribution system is expected to increase by 2 percent per year. Undertaking the new line of business will force the company to pay for the expansion in only 2 years instead of in 6 years for which it had initially planned. Given a cost of capital of 12%, what is the net cost (in $ millions, rounded to one decimal place e.g., 12.3) in present value terms, for the early expansion that should be included in the capital budgeting analysis of the proposal for expanding into the new line of business?
Pitts Industrial is planning to undertake a second line of business. With the new line of business, the firm will need to pay for an expansion of its distribution system earlier than it had initially planned. The current cost (in $ thousands) of expanding the capacity of its distribution system is $240 million and the cost of expanding the distribution system is expected to increase by 2 percent per year. Undertaking the new line of business will force the company to pay for the expansion in only 2 years instead of in 6 years for which it had initially planned. Given a cost of capital of 12%, what is the net cost (in $ millions, rounded to one decimal place e.g., 12.3) in present value terms, for the early expansion that should be included in the capital budgeting analysis of the proposal for expanding into the new line of business?
The answer should be 62.1
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