Part 1
Alternative 1
Building a Refrigerated Warehouse
| Initial cost | Maintenance cost | Salvage | |
| Year 1 | 650, 000 | $8,000 | |
| Year 2 | $8,000 | ||
| Year 3 | $8,000 | ||
| Year 4 | $8,000 | ||
| Year 5 | $8,000 | ||
| Year 6 | |||
| Year 7 | |||
| Year 8 | |||
| Year 9 | |||
| Year 10 | Not applicable |
Initial cost – $650,000
Running and Maintenance costs – $8,000 annually
Revenue growth – 10% annually
No salvage value – no applicable
Interest rate – 4.3%
Period 10 years
Annual running cost =
Expected benefits every year will be an increase in revenue due to adequate storage facilities. The 10% growth will lead to:
Annual benefits will be
Alternative 2
Renting a refrigerated ware house
Rent $95,000
Annual running and maintenance cost – $8,000
Therefore, alternative 1 holds
Using the Benefit cost Ratio
Alternative 1
This value is greater than 1
Alternative 2
This value is less than 1. Therefore, alternative 1 shows a viable solution for the firm.
Project 2
Depreciation
First year depreciation
Based on MACRS depreciation, the property has a life span of 10 year
First year depreciation =
Alternative – strait line method
Taxable Income
Federal Income Tax
Before-Tax ROR
Before Tax, the rate of return in the firm is 10%.
After-Tax ROR
The theoretical return rate for the investment is 10%, and the taxable rate is 34%. These values will give rise to:
Conclusion and Recommendations
- Building a warehouse is a viable option for renting one
- The firms should adopt the option of borrowing the loan and making a warehouse
- The firm should not use the straight-line depreciation method to determine the value of the asset.