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Jo Brown?s nursery operation has grown from a small herb plot into a thriving nursery business.




Jo Brown?s nursery operation has grown from a small herb plot into a thriving nursery business. There are 10 full-time employees and 20 seasonal (part-time) employees. For the last three years taxable income for Brown?s Nursery has been steady at $350,000 per year.;While Jo is pleased with the current success of the nursery, she is considering a new contract to supply a local grocery chain with fresh herbs year round. The grocery chain?s current supplier is retiring in a year and is planning to sell his business to one of the other grocery chains he also supplies. Rather than assigning a large portion of her current capacity;to this contract, she is considering expanding production. Jo has been offered a 5-year contract, starting in 1 year. To service this new contract without reducing current operations requires purchasing an adjacent piece of land and constructing additional greenhouse space. The property can be;purchased for $200,000. The most economical solution to the greenhouse addition is to construct two modular greenhouses for $70,000 each. The modular greenhouses have a useful life of 12 years and a $5000 salvage value. Start-up expenses are expected to be $22,500. The purchase of the land, construction of the greenhouses, and startup are projected to require one year. Incremental working capital for this project is $90,000 beginning with start-up.;Sales from the contract are forecast at $380,000 each year. Variable costs are estimated at $250,000 the first year, and Jo believes they will decrease at the rate of $5000 per year, as they become expert in growing the new items in the new greenhouses.;Incremental variable overhead for the new space is expected to be $30,000 per year but when the total overhead is re-allocated (based on square feet under glass) the new production;will be charged $45,000 per year.;Upon completion of the 5-year contract, Jo believes she can either obtain another contract from this customer, obtain a similar contract from another grocery chain, use the project?s assets to meet increased demand for herbs from current customers of the original operation;or dispose of the project?s assets. She believes the land can be sold for what was paid for it and each greenhouse is expected to have a market value of $40,000 at the end of the 5-year;contract. This decision will be made early enough in the fifth year of the contract to dispose;of the project?s assets in that year.;The state tax rate is 11%. Jo uses an after-tax MARR of 12%.


Paper#35280 | Written in 18-Jul-2015

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