Question
Fiber Glasses must choose one of two facilities. Facility I costs $5.0 million and its economic and depreciation life is 4 years. The maintenance costs
Fiber Glasses must choose one of two facilities. Facility I costs $5.0 million and its economic and depreciation life is 4 years. The maintenance costs for facility I are $80,000 per year (for 4 years).
Facility II costs $7 million, has an economic life of 7 years and a depreciation life of 4 years. The annual maintenance costs for facility II are $100,000 per year (for 7 years).
Both facilities should be fully depreciated using the straight line method. The facilities have no value after their economic lives. The corporate tax rate is 34 percent. Revenues from the facilities are the same. The company is assumed to generate sufficient revenues to generate tax shields from depreciation. If the appropriate discount rate is 12 percent, which facility should Fiber Glasses choose? Why?
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