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Should the proposed expansion be undertaken

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Question - WJW Ceramic Products Inc. leases plant facilities in which firebrick are manufactured. Because of rising demand, WJW could increase sales by investing in new equipment to expand output. The selling price of $2.50 per brick will remain unchanged if output and sales increase. Based on an engineering and cost estimates, the accounting department provides managers with the following forecast estimates based on an annual increased output of 400,000 bricks:

Cost of new equipment having an expected life of five years $500,000

Equipment installation cost $20,000

Expected salvage value $75,000

Additional annual utility expenses $40,000

Additional annual labor costs $160,000

Additional annual cost for raw material $400,000

CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 40%. WJW policy is not to invest capital in projects earning less than 20% rate of return.

Should the proposed expansion be undertaken?

Reference no: EM132909766

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