Meyers Inc. is considering overhauling its equipment to meet increased demand for its product. The cost of equipment overhaul is $4.5 million plus $500,000 in installation costs. The life of the project is 10 years. At the end of the project the equipment will be sold for $500,000. Additional sales revenue from the overhaul should amount to $3 million per year, and additional operating expenses (excluding depreciation) will amount to 60 percent of the additional sales. The project will require an investment in working capital of $200,000 at the beginning of the project Meyers’ tax rate is 25 percent and Meyers has a cost of money of 15 percent. Determine whether or not Meyers should overhaul the equipment.
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