The Thomas Co. is analyzing a proposed expansion project. Currently, the company owns 15 acres of land, which it purchased for $6 million 5 years ago. The land is currently valued at $7.2 million and is totally debt-free. The company wants to build a new distribution center at a cost of $19 million dollars, which will be depreciated on a straight-line basis over 30 years. An additional $500 thousand is required for developmental design plans and consulting fees. The center will require an increase in current assets of $2 million during the project life of 20 years. Management has estimated that the facility will increase the firm’s earnings before taxes by $2.5 million a year. After 20 years, the company plans to sell the facility, including the land, for an estimated $15 million.
The company has 50,000 shares of common stock outstanding at a market price of $46 a share. This stock just paid an annual dividend of $2.80 a share. The dividend is expected to increase by 4 percent annually. They also have 10,000 shares of 5 percent preferred stock with a market value of $51 a share. The company has a 8 percent, semiannual coupon bond issue outstanding with a total face value of $1.5 million. The bonds are currently priced at 101 percent of face value and mature in 11 years. The tax rate is 35 percent.
Should the Thomas Co. pursue the expansion at this point in time? Why or why not?