Bing Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $2.35 million. The
Question:
Bing Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $2.35 million. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $1.025 million, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $425,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 7 percent. The corporate tax rate is 23 percent. Should the company accept the project?
Step by Step Answer:
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan