Case 36 Brown's Nursery (Part A) Jo Brown's nursery operation has grown from a small herb plot into a thriving nursery business. There are 10 full-time employees and 20 seasonal (part-time) employees. For the last three years taxable income for Brown's Nursery has been steady at $350,000 per year While Jo is pleased with the current success of the nursery, she is considering a new contract to supply a local grocery chain with fresh herbs year round. The grocery chain's current supplier is retiring in a year and is planning to sell his business to one of the other grocery chains he also supplies. Rather than assigning a large portion of her current capacity to this contract, she is considering expanding production. Jo has been offered a 5-year contract, starting in 1 year. To service this new contract without reducing current operations requires purchasing an adjacent piece of land and constructing additional greenhouse space. The property can be purchased for $200,000. The most economical solution to the greenhouse addition is to construct two modular greenhouses for $70,000 each. The modular greenhouses have a useful life of 12 years and a $5000 salvage value. Startup expenses are expected to be $22,500. The purchase of the land, construction of the greenhouses, and startup are projected to require one year. Incremental working capital for this project is $90,000 beginning with startup. Sales from the contract are forecast at $380,000 each year. Variable costs are estimated at $250,000 the first year, and Jo believes they will decrease at the rate of $5000 per year, as they become expert in growing the new items in the new greenhouses. 166