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problem: National Bio Products [NBP] has employed you as a consultant to assess the economic feasibility of investing $1,000,000 to buy a fully operational toad ranch. The ranch is currently capable of raising & bringing to market 2,000,000 toads every year. The toads will be marketed & sold as environmentally safe insect control mechanisms at $250 per 1000 [toads]. Due to a worldwide shortage of toads & increasing concern over the environmental damage caused by pesticides, the price of toads is expected to increase at 8% per year for centuries to come. The cost of labor, which will be $400,000 next year, is expected to continue to increase in perpetuity at a rate of 7% per year. The apparatus that is used to aerate [supply oxygen to] the lagoon in which the toads reside must be replaced immediately. The current cost to replace the aerator is $200,000. Although aerators do not qualify for any investment tax credit, the aerator can be depreciated to a zero salvage value over a 4 year period using straight line depreciation. An industrial engineer hired by NBP estimates that the aerator must be replaced every five years. The cost of aerators is expected to increase at 4% per year far into the foreseeable future. Assuming that National Bio-Products has an opportunity cost of capital of 12% & a corporate tax rate of 40%, determine whether the firm should acquire the toad ranch.

Basic Finance, Finance

  • Category:- Basic Finance
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