WJW Ceramic Products Inc. leases plant facilities in which firebrick are manufactured. Because of rising demand, WJW could increase sales by investing in new equipment to expand output. The selling price of $2.50 per brick will remain unchanged if output and sales increase. Based on engineering and cost estimates, the accounting department provides managers with the following forecast estimates based on an annual increased output of 400,000 bricks: Cost of new equipment having an expected life of ten years $500,000 Equipment installation cost $ 20,000 Expected salvage value $ 75,000 Additional annual utility expenses $ 40,000 Additional annual labor costs $ 160,000 Additional annual cost for raw material $ 400,000 CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 40%. WJW policy is not to invest capital in projects earning less than 20% rate of return. Should the proposed expansion be undertaken?
WJW Ceramic Products Inc. leases plant facilities in which firebrick are manufactured. Because of rising demand, WJW could increase sales by investing in new equipment to expand output. The selling price of $2.50 per brick will remain unchanged if output and sales increase. Based on engineering and cost estimates, the accounting department provides managers with the following forecast estimates based on an annual increased output of 400,000 bricks: Cost of new equipment having an expected life of ten years $500,000 Equipment installation cost $ 20,000 Expected salvage value $ 75,000 Additional annual utility expenses $ 40,000 Additional annual labor costs $ 160,000 Additional annual cost for raw material $ 400,000 CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 40%. WJW policy is not to invest capital in projects earning less than 20% rate of return. Should the proposed expansion be undertaken?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 19P
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WJW Ceramic Products Inc. leases plant facilities in which firebrick are manufactured. Because of rising demand, WJW could increase sales by investing in new equipment to expand output. The selling price of $2.50 per brick will remain unchanged if output and sales increase.
Based on engineering and cost estimates, the accounting department provides managers with the following forecast estimates based on an annual increased output of 400,000 bricks:
Cost of new equipment having an expected life of ten years $500,000
Equipment installation cost $ 20,000
Expected salvage value $ 75,000
Additional annual utility expenses $ 40,000
Additional annual labor costs $ 160,000
Additional annual cost for raw material $ 400,000
CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 40%. WJW policy is not to invest capital in projects earning less than 20% rate of return .
Should the proposed expansion be undertaken?
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