The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The
Question:
The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The still has a useful life of 10 years but will be depreciated using straight-line depreciation over the next 5-years. It is expected to have a salvage value of $10,000 at the end of 10 years. The still would increase revenues by $120,000 per year and increase yearly operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net working capital. The firm’s marginal tax rate is 30 percent, and the project’s cost of capital is 10 percent. Should the new equipment be acquired according to NPV analysis?
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry