The XYZ is a startup company and is currently looking for storage spaces. The ma
ID: 2797289 • Letter: T
Question
The XYZ is a startup company and is currently looking for storage spaces. The market cost of renting and maintaining a storage room is $7500 per year. Another option is to build their own permanent storages The estimated cost of constructing one permanent storage is $218,000 and the annual cost of maintaining it is $12,000. 2. a. If the useful life of a permanent storage is assumed to be 20 years, how many storage spaces could be rented each year to break even with the cost of one permanent storage? Let i = 10% per year. Company XYZ decided t Maintenance cos income. Determin construction cost, with o build a storage and rent it out with these two rental plans detailed below ts of the storage will be paid by the renter and have been factored into the net e which rental plan has a shorter payback period to recover the $218,000 b. 10% per year. cost be recovered in 10 years? If not, what can the company do? truction is 10% per year, which rental plan is more beneficial when n-30? d, with Plan A Plan B Net income per year 30,000 $20,000 (first 10 years) $40,000 (11th year onwards)Explanation / Answer
The cost of constructing oe permanent storage is 218000 and thus if the company wants to build the storage the cash outlay will be 218000
and thus initial outaly = -218000 (at time zero)
Also if the company gives on rent or itself rents the storage the cost if 75000 of which 12000 is maintainance. Thus if the company gives permanent storage on rent their cash inflow would be 75000-12000 = 63000 per year (at time 1 to n)
Answer a.
Thus discounting the cash inflow by a year = 63000 / 1.1 = 57272.72
the number of storage can be rented to break even = 218000/57272.72 = 3.806
Answer b.
If the maintainance cost would be paid by renter the cash inflow would be entire of 75000
And thus discounting cashflow at 10% the break even point for projects are as below:
Years
Cashflow (factored in net income)
Discounted cashflow = Cashflow / 1.1^n
Cumulative Cashflow = Discounted cumulative cashflow in previous year + discounted cashflow in current year
0
-218000
-218000
-218000
1
63000
57273
-160727
2
63000
52066
-108661
3
63000
47333
-61328
4
63000
43030
-18298
5
63000
39118
20820
Payback period = 4 + (39118-20820) / 39118
4.468
Years
Cashflow (paid by renter)
Discounted cashflow = Cashflow / 1.1^n
Cumulative Cashflow = Discounted cumulative cashflow in previous year + discounted cashflow in current year
0
-218000
-218000
-218000
1
75000
68182
-149818
2
75000
61983
-87835
3
75000
56349
-31486
4
75000
51226
19740
5
75000
46569
66309
Payback period = 3 + (51226-19740) / 51226
3.615
Thus plan with maintenance storage cost paid by renter has a shorter payback period.
Answer c.
Yes the construction cost can be recovered in 10 years under both the plans ie if renter pays maintenance cost or it is factored in net income.
Answer d.
To see which plan is more beneficial we need to calculate NPV which is as below:
Years
Plan A
Plan B
0
-218000
-218000
1
30000
20000
2
30000
20000
3
30000
20000
4
30000
20000
5
30000
20000
6
30000
20000
7
30000
20000
8
30000
20000
9
30000
20000
10
30000
20000
11
30000
40000
12
30000
40000
13
30000
40000
14
30000
40000
15
30000
40000
16
30000
40000
17
30000
40000
18
30000
40000
19
30000
40000
20
30000
40000
21
30000
40000
22
30000
40000
23
30000
40000
24
30000
40000
25
30000
40000
26
30000
40000
27
30000
40000
28
30000
40000
29
30000
40000
30
30000
40000
NPV at 10%
$58,915.85
$32,895.67
As the NPV of Plan A is higher it is more beneficial.
Years
Cashflow (factored in net income)
Discounted cashflow = Cashflow / 1.1^n
Cumulative Cashflow = Discounted cumulative cashflow in previous year + discounted cashflow in current year
0
-218000
-218000
-218000
1
63000
57273
-160727
2
63000
52066
-108661
3
63000
47333
-61328
4
63000
43030
-18298
5
63000
39118
20820
Payback period = 4 + (39118-20820) / 39118
4.468
Years
Cashflow (paid by renter)
Discounted cashflow = Cashflow / 1.1^n
Cumulative Cashflow = Discounted cumulative cashflow in previous year + discounted cashflow in current year
0
-218000
-218000
-218000
1
75000
68182
-149818
2
75000
61983
-87835
3
75000
56349
-31486
4
75000
51226
19740
5
75000
46569
66309
Payback period = 3 + (51226-19740) / 51226
3.615
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