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John West Inc. (JWI) is thinking of setting up a plant to produce canned tuna in South Australia. The initial required investment in cannery is
John West Inc. (JWI) is thinking of setting up a plant to produce canned tuna in South Australia. The initial required investment in cannery is $5 million. The ATO allows the investment to be depreciated on a straight-line basis over 20 years. However, JWI management knows it will close the plant down in 10 years and the plant will have a salvage value of $1.75 million at that time. The plant will use a warehouse already owned by JWI. The current market value of the warehouse is $500,000. Working capital required is $1.25 million which has to be invested up front. Revenues will be $3 million per year and cost of production (before depreciation) will be $1.5 million per year
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