Problem:
Houma Bio-Control has hired you as a consultant to assess the economic feasibility of investing $2,500,000 to purchase a fully operational toad ranch. The ranch is currently capable of raising and bringing to market 5,000,000 toads per year. The toads will be marketed and sold as environmentally safe insect control mechanisms at $240 per 1000(toads). Due to a worldwide shortage of toads and increasing concern over the environmental damage caused by pesticides, theprice of toads is expected to increase at 6% per year for centuries to come. The cost of labor, which will be $1,000,000 next year, is expected to continue to increase in perpeuity at a rate of 5% per year. The apparatus that is used to aerate the lagoon in which the toads reside must be replaced immediately. The current cost to replace the aerator is $500,000. Although aerators do not qualify for any investment tax credit, the aerator can be depreciated to a zero salvage value over a 4 year period using straight-line depreciation. An industrial engineer hired by HBC estimates that the aerator must be replaced every five years. The cost of aerators is expected to increase at 4 percent per year far into the foreseeable future.
Required:
Question: Assuming that HBC has an opportunity cost of capital of 10% percent and a corporate tax rate of 40%, determine whether the firm should acquire the toad ranch.
Note: Explain all steps comprehensively.