Norris is a manufacturer of electronic devices. Sales have recently been lost because of the

inability to store sufficient finished goods inventory, even though Norris has the capability of

increasing production. The solution under discussion is to increase production to create a larger

finished good inventory so that lost sales will not occur in the future. To increase the inventory,

Norris estimates the following will be required:

i$.$ The finished goods inventory needs to be expanded by $$150,000.$

ii$.$ Existing vacant warehouse space is available for storing the additional inventory.

However, new equipment costing $$80,000$ with a $5-$year economic life is required.

Straight$-$line depreciation will be employed, and Norris$$s marginal tax rate is $40\%.$ Running

the warehouse will incur additional wages of $$40,000$ per year.

iii. The sales and production people estimate that the increased sales will result in a net cash

inflow to the firm $($after all production costs, but before considering the additional

warehouse expense and taxes$)$ of $$100,000$ per year.

iv$.$ In $5$ years, the equipment will have a resale value of zero. The $$150,000$ buildup in

inventory is no longer required.

$($a$)$ If the cost of capital is $13\%,$ should the expansion take place? Show your work.

$($b$)$ Suppose the warehouse space is currently rented out for $$50,000($before taxes$)$ per year. How

would that affect the firm$$s decision? Show your work.