Lee Manufacturing Inc. currently has 2 million shares of common stock outstanding, with a price of $20 per share. Analysts estimate that the expected return on this common stock is 13%. Lee also has $25 million in debt outstanding with an expected pre-tax return of 5.5%. The corporate tax rate for Lee is 35%. 

 

Lee is considering some new manufacturing equipment that will last 15 years and will increase annual revenues by $700,000 per year. This equipment will increase annual operating expenses (other than depreciation) by $270,000 per year. The equipment will cost $900,000 today and, for tax purposes, will be fully depreciated on a straight-line basis to a remaining book value of $0 over 15 years. However, management expects that it will be able to sell this equipment for scrap metal with a market value of $30,000 at the end of 15 years. Assume that any gain or loss on the sale of the equipment is taxable (or tax deductible) at the corporate tax rate.

 Should Lee acquire the machine? Why or why not?

Answer rating: 100% (QA)

SOLUTION To determine whether Lee Manufacturing Inc should acquire the new manufacturing equipment w... View the full answer