Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $1.91 million. The

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Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $1.91 million. The facility is to be fully depreciated on a straight-line 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 $965,000, 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 $425,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 7 percent. The corporate tax rate is 34 percent. Should the company accept the project?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Corporate Finance Core Principles and Applications

ISBN: 978-1259289903

5th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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