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# Investment on New Plant Decision Making Calculations

Question:
Looner Industries is considering investing in a new manufacturing plant. The plant requires an item of equipment that costs \$200,000. In addition, Looner will spend \$10,000 on shipping costs and \$30,000 on installation charges. The equipment will be housed in a building currently owned by the company. The building was bought at a cost of \$75,000 five years ago, but it could be sold now for \$125,000. Similar buildings in the area are leasing for \$5,000 per month.

You estimate that if the new plant is constructed, the company will increase its inventories by \$25,000, while accounts payable also will rise by \$5,000. New sales from the plant are estimated to be 120,000 units per year, at a price of \$3.50 per unit. Variable costs are expected to total 60% of sales, while fixed costs are estimated at \$20,000 per year. The plant has an estimated economic life of 4 years, after which time it will be scrapped for \$25,000 (excluding the building). Depreciation will be calculated using the 3-year MACRS rates of 33%, 45%, 15%, and 7% for the first through the fourth year, respectively. Looner Industries' marginal tax rate is 40%, and its cost of capital is 10%. Should the plant be built?

#### Solution Preview

See the attached file for Excel spreadsheet of calculations in its formatted version.

Inputs
Equipment Cost \$200,000
Shipping Cost \$10,000
Installation Charges \$30,000
Total Plant Cost \$240,000

Salvage Cost \$25,000

Relevant building cost \$5,000 per month
Marginal tax rate 40%
Cost of capital 10%
Fixed Costs \$20,000 ...

#### Solution Summary

The solution discusses the investment on new plant decision making calculations.

\$2.19