A Project Requiring Multiple Assets
Langley Manufacturing Company (LMC), a manufacturer of fabricated metal products, is considering purchasing a new computer controlled milling machine to produce a custom ordered metal product. The following summarizes the relevant financial data related to the project:
• The machine costs $90,000. The costs for its installation, site preparation, and wiring are expected to be $10,000. The machine also needs special jigs and dies, which will cost $12,000. The milling machine is expected to last 10 years, the jigs and dies 5 years. The machine will have a $10,000 salvage value at the end of its life. The special jigs and dies are worth only $1,000 as scrap metal at any time in their lives. The milling machine is classified as a 7 year MACRS property and the jigs and dies as a 3 year MACRS property.
• LMC needs to either purchase or build an8,000 ft2 warehouse in which to store the product before it is shipped to the customer. LMC has decided to purchase a building near the plant at a cost of $160,000. For depreciation purposes, the warehouse cost of $160,000 is divided into $120,000 for the building (39 year real property) and $40,000 for land. At the end of 10 years, the building will have a salvage value of $80,000, but the value of the land will have appreciated to $110,000.
• The revenue from increased production is expected to be $150,000 per year. The additional annual production costs are estimated as follows: materials, $22,000; labor, $32,000; energy $3,500; and other miscellaneous costs, $2,500.
• For the analysis, a 10 year life will be used. LMC has a marginal tax rate of 40% and a MARR of 18%. No money is borrowed to finance the project. Capital gains will also be taxed at 40%.