Reference no: EM133239415
Asterix Ltd, a luxury cosmetics brand is considering expanding into glow in the dark hair products. The company has called you, their trusted financial advisor, to recommend whether to proceed with the project. The company tells you that the cost of the machinery required to manufacture these safes is $290,000, with an additional $60,000 to install. The machinery will be depreciated straight line on an annual basis over 10 years to a salvage value of $30,000.
The company also estimates that the building in which the machine is to be installed requires renovation expenses of $100,000 if the company is to go ahead with the project, which for tax purposes will be expensed at the beginning of the project.
The project will generate pre-tax revenues in the first three years of $90,000, and then increase to $105,000 for the remainder of the useful life. Pre-tax expenses have been estimated to be (50 + ??)% of pre-tax revenues. Asterix Ltd also believes that they can receive $(?? ∗ 10,000) for the machinery at the end of its useful life. Given a required rate of return of 6% p.a. compounded quarterly, and a corporate tax rate of 30%, do you recommend that Asterix Ltd proceed with this project and commence manufacturing glow in the dark hair products? Why or why not?