Question
Gateway Communications is considering a project with an initial fixed asset cost of $2.5 million which will be depreciated using the straight-line method over the
Gateway Communications is considering a project with an initial fixed asset cost of $2.5 million which will be depreciated using the straight-line method over the 10 year life of the project. At the end of the project in year 10, the equipment has a book value of $50,000 and will be sold for an estimated $200,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 20 percent. The project will require $50,000 of net working capital which will be recouped when the project ends. Should this project be implemented if the firm requires a 15 percent rate of return? Why or why not?
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