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Mr. Gareth Bale, finance manager at M. Ozil Company (MOC), is evaluating an investment project that involves the expansion of one of the small assembly line for producing shirts. The machinery required for the assembly line costs MOC $1,080,000 plus additional $22,500 to install the assembly line. The assembly line falls into the MACRS 3-year class, and MOC expects to sell the system after 3 years for $605,000. The assembly line would require an increase of net working capital of $15,500. The utilization of the assembly line would increase the revenues of MOC by $480,000 per year due to higher production and sales. However, it is expected the new assembly to increase before tax operating costs of the company by $100,000 per year. MOC marginal tax rate is 35% and its WACC is 12%.
What is your advice to Mr. Bale concerning this investment? Show your work to justify your advice.
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