Copco Inc., a mining outfit in Southeastern Arizona, is considering abandoning one of its older plants. The plant currently has a book value of $10 million, and has a 5 year depreciable economic life remaining. Coco plans to continue depreciating the plant and the associated assets using straight-line depreciation. The firm has two options concerning the continued operation of the plant: (1) abandon the plant today and sell it for $15 million, or (2) continue operating the plant for the next 5 years at which time management estimates the plant will be worth S1 million. If the firm decides to operate the plant, cash revenues are estimated to be $7,000,000 per year while operating expenses are predicted to be $3,000,000 per annum. Copco is in the 40 percent tax bracket with an attendant Cost of Capital of 12 percent. given the above information, determine whether the plant should be abandoned today or continue to be operated for the next five years. Note: Provide quantitative support for your recommendation.
Copco Inc., a mining outfit in Southeastern Arizona, is considering abandoning one of its older plants. The plant currently has a book value of $10 million, and has a 5 year
given the above information, determine whether the plant should be abandoned today or continue to be operated for the next five years. Note: Provide quantitative support for your recommendation.
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