Reference no: EM132941824

To facilitate this temporary expansion, Automation will purchase new equipment for $1,500,000. The additional micro-processors will be manufactured in a building Automaton purchased eight years ago for $4,200,000. The building will be retooled for the new project at a cost of $500,000, which includes building permit fees of $25,000.[1]

• The purchased equipment will be depreciated using Modified Accelerated Cost Recovery System (MACRS) depreciation schedule (see exhibits), and sold for $250,000 in year 5.

• The projected revenue for year 1 is $550,000. Subsequent year's revenues will increase by eight percent of the preceding year's revenues (i.e., year 2 revenues equal 1.08 * $550,000, and so on). This expansion project will result in an annual loss of revenues from an existing manufacturing operation of $100,000. Operating expenses (excluding depreciation and amortization) is estimated at 20 percent of net revenues.

• Operating net working capital will rise by $250,000 and $300,000 in years 1 and 2, respectively. This investment in operating net working capital fully reverses in the final year of the project. Annual interest expense is fixed at $35,000.

Problem 1. Is Kofi's third mental note accurate? Discuss briefly.