Project Analysis

The college originally purchased the land for Paint Jude for $200 in an 1884 bankruptcy sale, but currently the land could be sold for $495,000 if St. Thaddeus decides not to pursue the project. Last year, the college commissioned a feasibility study for $75,000 to determine likely outcomes from the project. St. Thaddeus used the results of this study to develop the following projections for the four-year project. Before beginning the project, St. Thaddeus will need to spend a total of $625,000 on equipment, building improvements, and gallery renovations. These capital expenditures will be depreciated according to the three-year MACRS schedule in Table 1. At the end of the project, all the remaining equipment will be sold for $300,000 (before taxes). St. Thaddeus will also increase its accounts receivable and inventory by $100,000 and increase the college’s level of accounts payable by $30,000. At the end of the four-year project, net working capital will return to its pre-project level. During the Paint Jude project, the college will have to hire additional professors and staff. With their salaries and other expenses, St. Thaddeus will incur $550,000 of fixed annual costs. The college expects to enroll 75 students in Paint Jude in the first year. They expect that enrollment will grow by 15 students for each of the next three years. Each student will pay $25,000 per year in tuition, but they will generate $15,500 of annual costs for the college from the purchase of art supplies, gallery exhibition fees, and other per-student expenses. The appropriate discount rate for Paint Jude is 9.5%, and St. Thaddeus’s tax rate is 21%.