An existing company has to increase its manufacturing facilities in order to keep their market share. One alternative is to expand the present plant. If this is done the expansion will cost $500,000. In addition, labor costs will increase by $300,000 per year while additional costs for overhead, depreciation, taxes and insurance would be $250,000 per year.
A second facility requires construction and operation of new facilities at a location about 100 km. from the present plant. At the new location cheaper labor would be available. The new facilities would cost $700,000. The labor cost would be 200,000 per year while overhead, depreciation, taxes and insurance would total up to $300,000. If the minimum rate of return on investment is 20%, determine the minimum service life for which the facilities at the distant location would be profitable. Do not take depreciable life and service life to be the same.