You run a manufacturing corporation, which produces an annual output of 100,000 gallons. Operating costs are $2 per gallon. These costs are variablethey are always proportional to revenues. There are no other operating costs. A 200,000-gallon capacity plant costs $500,000 to build and has an indefinite life, with no salvage value. Additionally, your company has 10,000 bonds outstanding with a YTM of 7% and a $1,100 market price. The companys 500,000 shares of common stock sell for $30 per share and have a beta of 1.5. The rate on treasury bills is 4%, and the market return is 12%.

Tax rate is 40%.

Your company has discovered a new process that lowers the operating cost per gallon to $1.00. Assuming that the competition will catch up in three years and the market demand is sufficiently high, should you go with the decision of building a new plant with new technology? The new plant delivers three years of economic rents and is worth $500,000 at year 3 due to its infinite life (i.e., it does not depreciate). Tip: Assume the old plant is a zero-NPV investment.

What are the pros and cons of waiting one year to invest?