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PROBLEM Alamo Rock (AR) Inc. of San Antonio, a producer of steel reinforced concrete forms, is planning to enter into a long term contract with
PROBLEM Alamo Rock (AR) Inc. of San Antonio, a producer of steel reinforced concrete forms, is planning to enter into a long term contract with the Texas Highway Department to provide concrete forms for highway over- passes. AR estimates that this will increase their annual net operating income by $1, 000, 000. In order to take on the project, AR will have to purchase new equipment costing $800, 000 and this equipment will have to be replaced every 5 years. In addition, their existing equipment, costing $600, 000, will have to be replaced at the end of year 3 rather than the end of year 4, and moreover will have to be replaced every 5 years rather than every 6 years, as is the case now. (For simplicity, assume the tax rate is zero.) (7) [5] If the opportunity cost of capital is 10%, what is the present value of the increase in net operating income generated by taking on the highway project? (a)* $10,000,000. (b) Need more information. (c) $15,000,000. {d1 5514.00.000
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