Project Analysis and Inflation Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility
Question:
Project Analysis and Inflation Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $270,000. 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
$105,000, 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 $30,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. Sanders has other ongoing profitable operations. Should the company accept the project?
Step by Step Answer:
Corporate Finance With Connect Access Card
ISBN: 978-1259672484
10th Edition
Authors: Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe