Sales from the contract are forecast at $380,000 each year. Variable costs are estimated at $250,000 the first year, and Jo believes they will decrease at the rate of $5000 per year, as they become expert in growing the new items in the new greenhouses.
Incremental variable overhead for the new space is expected to be $30,000 per year but when the total overhead is re-allocated (based on square feet under glass) the new production will be charged $45,000 per year.
Upon completion of the 5-year contract, Jo believes she can either obtain another contract from this customer, obtain a similar contract from another grocery chain, use the project’s assets to meet increased demand for herbs from current customers of the original operation, or dispose of the project’s assets. She believes the land can be sold for what was paid for it and each greenhouse is expected to have a market value of $40,000 at the end of the 5-year contract. This decision will be made early enough in the fifth year of the contract to dispose of the project’s assets in that year.
The state tax rate is 11%. Jo uses an after-tax MARR of 12%.