Reference no: EM133120663

Solar Inc. is considering a new project that complements its existing business. The company bought a piece of land three years ago for $200,000. This land is currently appraised at $257,697 on an after-tax basis. The land will be used for the new project, and can be sold for the same value after the project is finished. The equipment necessary for production will cost $2 million and will be fully depreciated on a straight-line basis over four years. After four years the equipment can be sold for a market value of $150,000.

The marketing department predicts that sales related to the project will be $1.2 million per year for the next four years, after which the market will cease to exist. Cost of goods sold is predicted to be 25% of sales. Solar Inc. also needs to add net working capital of $100,000 immediately. The working capital is expected to increase by 5% per year, and it is fully recoverable at the end. The corporate tax rate is 34%. The required rate of return is 10%.

Is the cost of land ($200,000) is relevant? Briefly explain.