Problem IV 35 points The factory of the firm Silmarillion Inc., located in the valley of Minas Morgul, a municipality in the middle earth, has been experiencing profitability problems in recent years. The leaders of the firm, MM. Sarouman and Sauron are seriously considering closing the factory. It cost $ 85 million 15 years ago. If production is discontinued, the plant could be leased to another firm, Lothlorien Inc., for a sum of $ 750,000 per year (payable at the start of the year) for a period of 10 years. At the end of the 10 year period, the plant will have a residual value of $ 17 million if production continues otherwise its resale value would be $ 13 million. The land originally cost $ 375,705 and its market value in 10 years is estimated at $ 7,575,750 whether or not production continues. When the plant was built, the equipment cost a total of $ 57.5 million. If production is discontinued the equipment could be resold for a total sum of $ 25 million. This same equipment would have had a market value of $ 20 million in 10 years, but would have required major repairs of $ 10 million in five (5) years. This amount would be capitalized rather than recognized as expenditure for the year. Equipment is part of the tax category for which the depreciation rate for tax purposes is 20% on the declining balance. Repairs in year five (5) would be added to the balance in this category. The plant currently produces 11,000 units per year with a selling price of 1354 11s each. The total cost of production (not including depreciation) per unit is $ 900. For the next ten years, annual production is expected to decrease to a level of 9,800 units, a decrease in the unit selling price to $ 1,300 and a decrease in production costs (without taking into account depreciation) at $ 1050 per unit. The firm currently maintains working capital of $3,000,000 to operate the plant. With the expected decline in production, working capital requirements will decrease by $ 2,300,000. There will obviously no longer be any need for working capital when production is discontinued. Silmarillion Inc. is taxed at the marginal rate of 35%. If production is not discontinued immediately, it will likely be discontinued in ten (10) years and the plant will be sold at that time. The possibility of selling the plant immediately was rejected as the management of Silmarillion Inc. wanted to retain the option to restart production at any time. The tenant agrees to leave the factory with a period of six (6) months. In exchange, he pays rent lower than the normal market price. This decision has already been made so you don't have to take it into account here. The firm requires a rate of return of 12% on this type of project Taking the opportunity of your presence for training in the Finance & Accounting department of Silmarillion Inc., the CEO, Mr. Sarouman and the CFO. Mr. Sauron, ask you to prove yourself as a new graduate of UQM by weighing the two investment options involved. In other words, using the net present value (NPV) test, determine whether Silmarillion Inc. should continue production or lease its plant to Lothlorien Inc. for ten (10) years