Jayco, Inc. would like to set up a new plant. Currently, Jayco has the opportunity to buy an existing building at a cost of $240,000. The building falls into a MACRS 39-year class, with depreciation rates of 1.3% in Year 1, 2.6% in each of Years 2-39, and 1.3% in Year 40. Necessary equipment for the plant will cost $150,000, including installation costs. The equipment falls into a MACRS 5-year class. Depreciation rates for this class are 20%, 32%, 19%, 12%, 11%, and 6%. The project would also require an initial investment of $50,000 in net working capital. The initial working capital investment would also be made at the beginning of the project’s life, that is, in Year 0. The project's estimated economic life is four years. At the end of that time, the building is expected to have a market value of $100,000, whereas the equipment would have a market value of $20,000. The production department has estimated that variable manufacturing costs would total 60% of sales and that fixed overhead costs, excluding depreciation, would be $50,000 a year. Depreciation expenses would be determined for the year in accordance with the MACRS rate. Annual sales will be $600,000. Jayco's marginal federal-plus-state tax rate is 40%; its cost of capital is 12%; and, for capital budgeting, the company's policy is to assume that operating cash flows occur at the end of each year. Should Jayco go ahead with the project?
Jayco, Inc. would like to set up a new plant. Currently, Jayco has the opportunity to buy an existing building at a cost of $240,000. The building falls into a MACRS 39-year class, with
Necessary equipment for the plant will cost $150,000, including installation costs. The equipment falls into a MACRS 5-year class. Depreciation rates for this class are 20%, 32%, 19%, 12%, 11%, and 6%.
The project would also require an initial investment of $50,000 in net working capital. The initial working capital investment would also be made at the beginning of the project’s life, that is, in Year 0. The project's estimated economic life is four years. At the end of that time, the building is expected to have a market value of $100,000, whereas the equipment would have a market value of $20,000.
The production department has estimated that variable
Jayco's marginal federal-plus-state tax rate is 40%; its cost of capital is 12%; and, for capital budgeting, the company's policy is to assume that operating cash flows occur at the end of each year.
Should Jayco go ahead with the project?
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