Please do not use any computer programs to arrive at the solution.
You are thinking about renovating a leased office. The renovations
would cost $180,000, and would be depreciated straight-line to zero over
the five years remaining on the lease. The new office would save you
$22,500 per year in heating and cooling costs. Also, absenteeism should
be reduced and the new image should increase revenues. These last two
items would result in increased operating revenues of $25,500 annually.
The tax rate is 40%, and the discount rate is 15%. From a strictly
financial perspective, should the renovations take place?
This question was asked on Apr 11, 2010.
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