Question
Harry Inc. has been considering starting a new manufacturing facility for $2.7 million. The facility is to be fully depreciated on a straight-line basis over
Harry Inc. has been considering starting a new manufacturing facility for $2.7 million. The facility is to be fully depreciated on a straight-line basis over 9 years. It is expected to have a resale value of $0.8 million at the end of seven years when Harry Inc. wants to sale the factory. Operating revenues for the facility are expected to be $1.05 million, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $300,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. Harry Inc. has other ongoing profitable projects. Should Harry Inc. accept the project?
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