Capital Budgeting

MPS was founded 15 years ago as a lawn care and snow removal company.The business has been doing great and is profitable but for the past 5 years, the revenue has become stagnant and hasn't grown.In fact, MPS is forecasting that the net income of the lawn care and snow removal business will start decreasing.The net income for the fiscal year just ended is $1,000,000 and MPS expects the net income will decrease by $100,000 per year for the next 8 years if no changes are made.In order to combat the expected decline in the lawn care and snow removal business, MPS would like to expand its offering by manufacturing its own brand of lawn mower and snow blower for sale.MPS believes that there is a market demand for high quality lawn mower and snow blower.To confirm their assumptions, they have hired a market research firm last year for $250,000 to conduct a market study.The result of the study indicates that there is indeed a strong market demand for high quality lawn mower and snow blower.MPS is now considering whether to establish a manufacturing plant to manufacture their own brand of lawn mower and snow blower for sale.

If MPS decide to pursue this project, the manufacturing plant would be built on a piece of land that is currently owned by the company.The land is currently vacant and has been vacant for 15 years (since the company's inception).If the company were to sell the land today, it could be sold for $600,000.Another option is to rent the land out to another company, If MPS were to rent it out, it could get $150,000 of rental income per year.

Based on the market research conducted last year, MPS has made the following assumptions with respect to the sales and the production cost of the lawn mower and snow blower: