Expert Solutions

1. Your firm is evaluating a new manufacturing plant. The land that the plant will be built on cost $100,000 ten years ago.The firm paid cash for the land and is currently worth $250,000. Your financial manager has argued that since the land is already paid for, it should not be included in the evaluation. Since the cash flow to pay for the land occurred 10 years ago, it has no relevance in the current decision.
Is the manager correct? Why? Does your decision change if the firm still owes money on the land? Briefly Explain.

2. Acme Inc. is considering an investment in a proposed project which requires an initial expenditure of $100,000. This expenditure can be depreciated at the following rates.
Year Depreciation rate
1 20%
2 32%
3 19%
4 12%
5 11%
6 6%
The project has an economic life of six years. The projects revenues are estimated to be $90,000 a year. The projects operating costs are estimated to be $50,000 a year. After six years, the projects estimated salvage value is $10,000. The cost of capital is 10% and the firm's coprorate tax rate is 40%. What is the projects net present value?