Problem:
You are thinking about renovating a leased office. The renovations would cost $180,000, and would be depreciated straight-line to zero over the five years remaining on the lease. The new office would save you $22,500 per year in heating and cooling costs. Also, absenteeism should be reduced and the new image should increase revenues. These last two items would result in increased operating revenues of $25,500 annually. The tax rate is 40%, and the discount rate is 15%. From a strictly financial perspective, should the renovations take place?