Question: Mustaine Enterprises Inc has been considering the purchase of a
Mustaine Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $1,140,000. The facility is to be fully depreciated on a straightline basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $750,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $410,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 11 percent. The corporate tax rate is 34 percent. Mustaine has other ongoing profitable operations. Should the company accept the project?
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