Inflation and Investment Analysis. Sittin'-in-the-Sun Health Spas is evaluating an expansion of its existing facilities this fall. The proposal calls for a 6-year building rental contract at \(\$ 10,000\) a year. Equipment purchases and facility improvements are expected to cost \(\$ 60,000\). Straight-line depreciation ignoring the half-year convention is used. Other cash operating expenses are estimated at \(\$ 25,000\) annually. Based on past experience, the company thinks new revenues should be \(\$ 50,000\) annually. Sittin'-in-the-Sun will not expand unless the project covers its 14 percent cost of capital. The company's effective tax rate is 40 percent.

Inflation is a concern. The controller thinks that revenues and cash expenses will inflate by 5 percent per year. Round the discount rate to the next highest rate available in Table 2 in Chapter 12, page 536.

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Using NPV, suggest whether the expansion project should be adopted.