Olourun Ltd is the major employer in the Front Hill area, where the firm is located. The
Question:
Olourun Ltd is the major employer in the Front Hill area, where the firm is located. The
company is considering the acquisition of a new production line. The equipment would cost
$720 000 and installation cost would amount to $59 000. At the end of its 5-year life, it is
expected to be disposed of at its salvage value of $70 000. The new equipment would allow the
company to expand production significantly, which would require an increase in working capital
of $90 000. If the purchase is made, the firm's maintenance costs would be reduced by $60 000
annually. However, at the end of the third year, a major overhaul would have to be undertaken at
a cost of $80 000. Operating cash flows would be $220 000 in the first year; this would increase
by 2% for each of the following years.
The company's cost of capital is 14% and the relevant corporate tax rate is 25%