Rediform Concrete is considering a $5 million capital investment for a factory to manufacture formed concrete products, such as patio stones, mobile home stones, and lawn decorations. The proposed factory will generate annual sales between $2 million and $5 million. After-tax fixed costs are $500k per year and after-tax variable costs are 50% of sales. Therefore, annual after-tax cash flow for the project is (0.5)Sales.
The expected life of the project is 5 years and the salvage value depends on land prices at the end of five years. The factory would be built on Palmetto Rd., near the Sunshine Expressway. A new freeway exit is being planned for the Sunshine Expressway. If the exit is built at Palmetto Rd., the salvage value of the factory will be $3 million. If the exit is located at one of the two competing roads, the salvage value will be $1 million. Ignore depreciation in your calculations.