Reference no: EM132481014

US Steel is considering adding an additional furnace that will operate for ten years, starting in Year 1 (Currently, it's Year 0). Last year the company commissioned a feasibility study that costs $1 million. The study came up with the following numbers. The new furnace costs $1,000 million and has a salvage value of $200 million at the end of the ten-year period. [We will talk about how to deal with the salvage value on Thursday 03/05.] Using the new furnace increases sales by $150 million per year and involves operating expenses of $10 million per year. Moreover, working capital requirements increase by $20 million immediately (added back once the project is over). According to IRS, the new furnace must be depreciated straight line over 8 years. The new furnace will need parts from an old furnace US Steel already owns. The old furnace is fully depreciated and has after-tax resale value of $30 million. Without the parts, the old furnace has no resale value. The corporate tax rate is 35% and the cost of capital is 10%. Should US Steel go ahead with the new furnace?