USX is considering adding an additional furnace that will operate for ten years. Last year the...
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USX is considering adding an additional furnace that will operate for ten years. Last year the company commissioned a feasibility study that cost $1 million. The study came up with the following numbers. The new furnace costs $1,000 million and has a salvage value of $200 million at the end of the ten-year period. Using the new furnace increases sales by $150 million per year and involves operating expenses of $10 million per year. Moreover, working capital requirements increase by $20 million immediately. According to IRS rules the new furnace must be depreciated straight line over eight years. The new furnace will need parts from an old furnace USX already owns. The old furnace is fully depreciated and has a resale value (after-tax) of $30 million. Without the parts, which are no longer manufactured, the old furnace has no resale value. The corporate tax rate is 35% and the cost of capital is 10%. Should USX go ahead with the new furnace? USX is considering adding an additional furnace that will operate for ten years. Last year the company commissioned a feasibility study that cost $1 million. The study came up with the following numbers. The new furnace costs $1,000 million and has a salvage value of $200 million at the end of the ten-year period. Using the new furnace increases sales by $150 million per year and involves operating expenses of $10 million per year. Moreover, working capital requirements increase by $20 million immediately. According to IRS rules the new furnace must be depreciated straight line over eight years. The new furnace will need parts from an old furnace USX already owns. The old furnace is fully depreciated and has a resale value (after-tax) of $30 million. Without the parts, which are no longer manufactured, the old furnace has no resale value. The corporate tax rate is 35% and the cost of capital is 10%. Should USX go ahead with the new furnace?
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Heres an analysis to help USX decide whether to invest in the new furnace Cash Flows Year 0 Initial ... View the full answer
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