Lala Land Corporation (LLC) intends to purchase a piece of machinery for $1,000,000. The project...
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Lala Land Corporation (LLC) intends to purchase a piece of machinery for $1,000,000. The project has a life of 5 years and the machine can be sold for $75,000 at the end of five years. In addition, the company expects to have to make an investment of $90,000 in Net Working Capital to operate the equipment (incremental working capital investment), which will be recovered at the end of the project, at the end of year 5. LLC plans to utilize its own facility that is they currently lease for $30,000 per year. Due to this project; they will have to let the tenant go.
As a result of this investment the following items get affected. 1) LLC expects to increase its revenues by $1mn per year.
2) Its variable expenses are 30% of revenues, and it has incremental fixed costs of $125,000 per year.
3) LLC has a 33% tax rate and its discount rate is 11% and the CCA rate for the machinery is 25%.
Please advise the management of LLC on the decision with respect to the underlying project.
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