Reference no: EM131311066

The CEO for Fincher Mfg., a producer of building materials located near Atoka, Oklahoma, is evaluating a proposal to produce asphalt shingles at the firm’s idle manufacturing facility on the North side of Atoka. Although the vacant facility could be sold for $2,500,000, it is carried on Fincher's books at historical cost of $5,000,000. 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 $63 million and can be expected to have a useful life of 10 years. The Internal Revenue Service allows machinery used in producing construction materials to be depreciated to a zero salvage value over 7 years using straight-line depreciation. Sales are expected to be $50,000,000 per year during each of the next 10 years. The variable costs of production are expected to be 70 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 7 times per year. The firm has an opportunity cost of capital of 10 percent and a corporate tax rate of 40 percent. Assuming that at the end of 10 years further investment in producing asphalt shingles will be unprofitable and that the salvage value of the manufacturing facility and equipment will be zero, determine whether Fincher should undertake the investment in shingle production.