Determine the minimum service life allowable

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Reference no: EM131061599

The facilities of an existing chemical company must be increased if the company is to continue in operation. There are two alternatives. One of the alternatives is to expand the present plant. If this is done, the expansion would cost $130,000. Additional labor costs would be $150,000 per year, while additional costs for overhead, depreciation, taxes, and insurance would be $60,000 per year.

A second alternative requires construction and operation of new facilities at a location about 50 miles from the present plant. This alternative is attractive because cheaper labor is available at this location. The new facilities would cost $200,000. Labor costs would be $120,000 per year. Overhead costs would be $70,000 per year. Annual insurance and taxes would amount to 2 percent of the initial cost. All other costs except depreciation would be the same at each location. If the minimum return on any acceptable investment is 9 percent, determine the minimum service life allowable for the facilities at the distant location for this alternative to meet the required incremental return. The salvage value should be assumed to be zero, and straight-line depreciation accounting may be used.

Reference no: EM131061599

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