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American Biodyne (AB) Is Considering Expanding into a New Line

question 28

Multiple Choice

American Biodyne (AB) is considering expanding into a new line of business.The expansion will require an investment of $500,000 in new equipment.This equipment which will cost another $300,000 to install, will be depreciated on a straight-line basis over an 8-year period to an estimated salvage value of zero.If the expansion project is accepted, working capital will increase by $100,000 immediately.Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8.Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years.AB has a marginal tax rate of 40% and its required rate of return for the project under consideration is 16%.If AB assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year, should the expansion be undertaken?

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