Reliable Electric is considering a proposal to manufacture a new type of industrial electric motor. The project would make use of an existing warehouse, which is currently rented out to a neighboring...

Reliable Electric is considering a proposal to manufacture a new type of industrial electric motor. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental rate of the warehouse is $100,000 (after tax), and thereafter the rent is expected to grow at 5% a year. In addition to using the warehouse, the project requires a purchase of plant and equipment that cost $1.2 million. This could be depreciated for tax purposes by the straight-line method over 10 years. However, Reliable Electric expects to terminate the project after 8 years and to resell the plant and equipment for $400,000. The project also requires an initial investment in working capital of $350,000. From year 1 the working capital will increase by 20,000 every year until the end of the project and then it will be recovered in full. The revenues of Reliable Electric are expected to be $4.2 million in the first year and to grow by 7% every year. The operating expenses are expected to be 90% of the revenues and profits are subject to tax at a rate of 35%. The cost of capital is 12%. Should Reliable Electric proceed with the project?