Luft Products is considering a proposal to open another operation in Sheridan, Wyoming. The following information has been compiled for you.
1. The initial investment is $400,000 to equip the facility.
2. The facility will be operated for eight years and depreciated uniformly over its life.
3. At the end of the eight-year period, Luft will spend $40,000 to clean up the facility and return it to the city. (This is a tax-deductible expense.)
4. The pretax net cash flows are expected to be $75,000 annually.
5. To operate the new facility, Luft will require an additional inflow of working capital in the amount of $60,000. This working capital will be released at the end of the eight-year period.
6. The equipment will be sold at the end of the period for an estimated $20,000.
7. Luft’s tax rate is 30 percent and its cost of capital is 10 percent.
A. Calculate the net present value of the new facility.
B. Should Luft invest in the new facility? Why?