STC & Tweety, LLP, own and operate a canary breeding farm. For the most recent year, STC & Tweety generated revenues of $250,000, incurred cash operating costs of $120,000, and had an after-tax net income of $77,000.
STC & Tweety are considering replacing their canary breeding barn. The current (“old”) breeding barn has a book value of $60,000 and could be sold today for $45,000. Alternatively, the current barn could be used for the next three years, after which if could be sold for $3,000.
If STC & Tweety decide to keep using the old barn then they anticipate spending $10,000 to fix (repair) the barn at the end of the first year. These costs are considered a routine maintenance expense and will not increase the barn’s book value.
A new canary barn would cost $180,000, but it would save STC & Tweety $70,000 in before-tax operating costs for each of the next three years. In addition, after the third year STC & Tweety could sell the new barn to a local farmer for $5,000.
STC & Tweety depreciate all of their assets using straight-line depreciation and zero assumed salvage value. Their required rate of return (cost of capital) is 10%, and their tax rate is 30%.
Assume all operating cash flows occur at year end.

Required:
a. Define the status quo.
b. Define the alternative.
c. What is the incremental initial after-tax cash outflow associated with the alternative you have defined? Be sure to include all relevant cash flows.
d. What is the alternative’s incremental after-tax cash inflow for the end of year 2?
e. Draw a time line that shows all of the incremental cash flows associated with the alternative you have defined.
f. Should STC & Tweety, LLP invest in the new barn?