You need to know whether the building of a new warehouse is justied under the fo
ID: 2587059 • Letter: Y
Question
You need to know whether the building of a new warehouse is justied under the following conditions: The proposal is for a warehouse costing $200,000. The warehouse has an expected useful life of 35 years and a net salvage value (net proceeds from sale after tax adjustments) of $35,000. Annual receipts of $37,000 are expected, annual maintenance and administrative costs will be $8,000/year, and annual income taxes are $5,000. Given the foregoing data, which of the following statements are correct?
(a)The proposal is justied for a MARR of 9%.
(b)The proposal has a net present worth of $152,512 when 6% is used as the interest rate.
(c)The proposal is acceptable, as long as MARR <= 11.81%.
(d)All of the preceding are correct
Explanation / Answer
Evaluation of Statement (a) MARR=9% Initial investment=200000 Present value of salvage value at the end of 35th year=35000*0.048986=1715 Net cashinflow per year=37000-8000-5000=24000 Present value of net cashinflow per year for 35 years=24000*10.56682=253604 Net present value=-200000+1715+253604=55319 The proposal is justified since NPV is positive. Statement is correct. Evaluation of Statement (b) MARR=6% Initial investment=200000 Present value of salvage value at the end of 35th year=35000*0.130105=4554 Net cashinflow per year=37000-8000-5000=24000 Present value of net cashinflow per year for 35 years=24000*14.49825=347958 Net present value=-200000+4554+347958=152512 Statement is correct. Evaluation of Statement (c) MARR=11.81% Initial investment=200000 Present value of salvage value at the end of 35th year=35000*0.020099=703 Net cashinflow per year=37000-8000-5000=24000 Present value of net cashinflow per year for 35 years=24000*8.297213=199133 Net present value=-200000+703+199133=-164 The proposal is justified since NPV is not positive. Statement is incorrect.
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