Gory Details, Inc., a national tabloid newspaper, is considering an expansion of its printing facility.
The construction will take a year to complete. Land can be purchased immediately for $200,000. An additional $600,000 will be needed now to begin construction.
The final stage of the construction will require a $600,000 cash outflow at the end of the first year.The first sales from operation of the new facility will occur at the end of year 2.
Sales will be $850,000 and will continue at that level for 10 years (year 2 through year 11).
Operating costs on these sales are composed of $100,000 fixed operating costs per year and variable operating costs equal to 45% of sales.
The $1,200,000 facility will be depreciated using simplified straight line over the 10 year period from year 2 through year 11
When the plant is closed it will be sold for $400,000 and the land will be sold for $350,000.Gory Details, Inc., has a 34% marginal tax rate and has a 14% required rate of return on its capital investment projects. Should this project be accepted?