Considering capital expenditure

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Reference no: EM131074613

Pharmacy Manufacturing is considering a capital expenditure of $1 million to upgrade its production process to improve quality control. The IRS requires that capital expenditures of this type be depreciated over two years on a straight line basis. The vendor will be paid $70,000 per year to provide quality control process improvement. The upgrade is forecasted to reduce drug spoilage costs by $600,000; litigation expenses should decrease by $110,000 per year due to fewer product liability lawsuits; and liability premiums are projected to fall by $40,000 per year for each of the next two years.

Should the capital expenditure be made assuming your OCC is 7 percent and corporate tax rate is 35 percent?

How does your answer change if you use 60/40 accelerated depreciation?

Reference no: EM131074613

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