Asgone plc is considering an investment to increase its manufacturing capacity from 10,000 units per annum to 15,000 units. The current output is sold at a price of $12.50 per unit but market research suggests the higher level of output could be sold at a price of $10 per unit. As the existing plant is due to be replaced this year it is a good time to consider the possibility of expansion. The variable cost per unit of the larger plant is $3.50 whereas it is $5.00 for the smaller plant. The largerplant will cost $60,000 and the smaller plant $25,000. Both plants would be depreciated on a straight-line basis for tax purposes over a five-year life, and this also constitutes the expected working life of the plant. All other costs would remain unchanged. The relevant tax rate is 20%. Is the investment in the larger plant worthwhile if the required rate of return is 10%?

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