Reference no: EM131749970

Question: A firm is re-evaluating one of its current product lines to determine whether it will continue to be profitable or whether it should be discontinued. Net operating revenues (sales minus all operating costs) are estimated to be $3 ,000 per year for each of the next 6 years, after which time they will drop to $2,000 per year. It is estimated that the product line has a useful life of 10 years; that is, after year 10 no further revenues are anticipated. If the product line were shut down, it would entail immediate expenses of $4,500. On the other hand, machinery used in the production could be sold for $ 1 2,000. This machinery is part of an asset class for which the applicable rate for CCA is 30 percent. The class is not left empty by the sale of the machinery. The floor space that is vacated by the shutdown could be leased out at $ 1,200 per year. The firm's tax rate is 40 percent, and the appropriate discount rate is 14 percent. Based on a net present-value analysis, should the firm continue operations or close down the product line?