Bender Guitar Corporation, a manufacturer of custom electric guitars, is contemp

Question

Bender Guitar Corporation, a manufacturer of custom electric guitars, is contemplating a $1,000,000 investment in a new production facility. The economic life of the facility is estimated to be five years, after which the facility will be obsolete and have no salvage value.

To make the new facility operational, building improvements costing $400,000 will be required. In addition, a $50,000 increase in working capital will be needed.

Bender's accounting and marketing departments have provided the following information: the firm will use the straight-line method of depreciation; the Company is in the 30% tax bracket; the weighted average cost of capital is 8%.

Here are Earnings before Interest and Taxes (EBIT) estimates for the new facility:

Year 1.........$80,000

Year 2.......$100,000

Year 3.......$120,000

Year 4........$140,000

Year 5.......$165,000

Your assignment is to answer the following questions:

Explanation / Answer

spend 1,000,000 for a building, 400,000 for remodeling and other structural changes
spending $1,400,000 total just for the facility alone, which will become an abandoned eyesore after only five years.

during this five years in that building you will produce $605,000 worth of product?
or are you producing a product that will net you before taxes $605,000?
if the former, fire your managers, accountants, and everybody who has anything to do with this lame-brained idea.
if the later, realize you will make a before tax profit of 4.32% over five years, which averages out to about .086% per year.
you can do better letting the money rot in a checking account, or paying down other obligations
after the shareholders sack you, they will probably sue you for failure to act in a responsible manner

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