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problem:
Looner Industries is considering investing in a new manufacturing plant. The plant requires an item of equipment that costs \$200,000. In addition, Looner will spend \$10,000 on shipping costs and \$30,000 on installation charges. The equipment will be housed in a building currently owned by the company. The building was bought at a cost of \$75,000 five years ago, but it could be sold now for \$125,000. Similar buildings in the area are leasing for \$5,000 per month.

You estimate that if the new plant is constructed, the company will increase its inventories by \$25,000, while accounts payable also will rise by \$5,000. New sales from the plant are estimated to be 120,000 units per year, at a price of \$3.50 per unit. Variable costs are expected to total 60% of sales, while fixed costs are estimated at \$20,000 per year. The plant has an estimated economic life of 4 years, after which time it will be scrapped for \$25,000 (excluding the building). Depreciation will be find outd using the 3-year MACRS rates of 33%, 45%, 15%, and 7% for the first through the fourth year, respectively. Looner Industries' marginal tax rate is 40%, and its cost of capital is 10%. Should the plant be built?

Business Management, Management Studies

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