Question
Your firm is contemplating a capital investment in equipment that will enable a new product line. Last month you paid a consultant $50,000 to analyze
Your firm is contemplating a capital investment in equipment that will enable a new product line. Last month you paid a consultant $50,000 to analyze the feasibility of the product line, but now you have tasked your financial analysis group with evaluating the product line. The equipment will cost $2,000,000 (payable today). The equipment will be depreciated straight line to $0 over the two year operating period. You believe that the equipment will have a $650,000 salvage value at the end of year 2. The expected annual revenues are $13,000,000, annual cash expenses will be $10,250,000.To start production, an upfront investment in net working capital of $50,000 will be required (assume full recovery at the end of the operating period). With a tax rate of 21% and a discount rate of 10%, should this expansion be undertaken?
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