Maine Corp. is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $20 million in initial investment and would result in a cost savings, before tax, of 3.25 million per year for 5 years. The equipment could be sold for 4.5 million at the end of the 5 years. The equipment would also result in an increase in NWC or $140,000, which will be recovered at the end of the project. The Company's CCA rate is 22% and the corporate tax rate is 40%.
If Maine Corps WACC is 7%, should they proceed with the project?
Maine Inc. Purchased an area of land last year for 2.5 million. At that time the company spend $75,000 in legal fees and $200,000 to have the site graded. The company borrowed to buy the land and now has interest costs of $20,000 per year. The company now has the choice of building one large factory on the site or a strip mall containing several smaller stores. What costs identified above should be included in the capital budgeting analysis?