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Houma Bio-Control (HBC) has appointed you as a consultant to assess economic feasibility of the investing $2,500,000 to buy a fully operational toad ranch. The ranch is currently able of raising and bringing to market 5,000,000 toads each year. The toads will be marketed and sold as environmentally safe insect control mechanisms at $240 per 1000 (toads). Because of a worldwide shortage of toads and raising concern over the environmental damage caused through pesticides, the price of toads is anticipated to rise at six percent per year for centuries to come. The cost of labour, which will be $1,000,000 next year, is anticipated to continue to rise in perpetuity at a rate of five percent per year. The apparatus which is used to aerate (supply oxygen to) the lagoon in which the toads reside should be replaced immediately. The current cost to replace the aerator is $500,000. Though aerators don’t qualify for any investment tax credit, the aerator can be depreciated to a zero salvage value over a four-year period by using straight-line depreciation. An industrial engineer appointed by HBC estimates that the aerator should be replaced every five years. The cost of aerators is anticipated to increase at four percent per year far in the foreseeable future. Supposing that HBC has an opportunity cost of capital of ten percent and a corporate tax rate of 40 percent, verify whether the firm must acquire the toad ranch.

Financial Accounting, Accounting

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