Reference no: EM131749975

Question: A firm considers building a new and improved production facility for one of its existing products. It would be built on a piece of vacant land that the firm owns. This land was acquired 4 years ago at a cost of $300,000; it has a current market value of $550,000. The building can be erected for $400,000. Machinery worth $ 1 60,000 needs to be bought. Capital cost allowances on a declining balance will be taken on all depreciable assets at a rate of 20 percent. Operating savings from the new production facility are expected to be $220,000 per year for the next 10 years. The salvage value at the end of the 10 years is expected to be $800,000, which is solely the value of the land. The firm's tax rate is 40 percent, with capital gains taxed at half their value. The firm's weighted average cost of capital is estimated at 12 percent. Based on a discounted cashflow analysis, should the investment be undertaken?