Reference no: EM13380819

The CEO for the Bynum Manufacturing, a producer of building materials located in Durant, Oklahoma, is evaluating a proposal to begin producing asphalt shingles at the firm's idle manufacturing facility on the North side of Denison, Texas. Although the vacant facility has no conceivable alternative use, it is carried on Bynum's books at its historical cost of $3,000,000. The equipment required for the production of asphalt shingles, including Surfacing Sections, an Accumulator, a Granule Mixing System with proportional valve control, and Shingle Cutters will cost $40 million and can be expected to have a useful life of 9 years. The Internal Revenue Service allows machinery used in producing construction materials to be depreciated to a zero salvage value over 5 years using straight-line depreciation. Sales are expected to be $36,000,000 per year during each of the next 9 years. The variable costs of production are expected to be 66.6667 percent of sales. Although the project will not require an investment in accounts receivable, the chief financial officer estimates that the firm will need to maintain an inventory of finished shingles. The industry standard for inventory turnover on the manufacturing side of the construction industry is 24 times per year. The firm has an opportunity cost of capital of 10 percent and a corporate tax rate of 35 percent. Assuming that at the end of 9 years, soon to be enacted EPA regulations will make further investment in the production of asphalt shingles unprofitable, determine whether the firm should undertake the investment in shingle production.