ASSIGNMENT #$1$

A company is considering building a new and improved production facility for one of its

existing products. It would be built on a piece of vacant land that the firm owns. This

land was acquired four years ago at a cost of $$250,000$; it has a current market value

of $$400,000.$ The building can be erected for $$300,000.$ Machinery $($equipment$)$ worth

$$60,000$ needs to be bought. The company will finance the construction of the building

and the purchase of the equipment by borrowing $$360,000$ for $10$ years at $5\%$ interest.

Interest will be paid annually and the full amount of the loan will be repaid in one

payment at the end of the $10$ years. The company's net working capital will increase

by $$60,000$ if the new production facility is built. Operating savings from the new

production facility are expected to be $$180,000$ per year for the next $10$ years. The

total fair market value $($salvage value$)$ of the assets at the end of the $10$ years is

expected to be $$500,000-20\%$ of which is attributable to the building and equipment.

The building and equipment will be amortized$/$depreciated on a straight$-$line basis over

$10$ years. The firm's tax rate is $40$ percent and the CCA rate is $20\%.$ The firm's

weighted average cost of capital $($WACC$)$ is estimated at $10$ percent. Should the

company build the new and improved production facility? Round final dollar

amounts $($in each category$)$ to the closest dollar $($i$.$e$.,$ ignore cents$)$

$[$NOTE: Although not realistic, the question assumes that the construction of the

building will be completed "immediately". Thus, the operating savings are realized

starting Year $1.]$

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