Gooleys Lunch Wagons Inc. is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.
At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year.
The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends.
Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?