Part 1

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

1. Building a warehouse is a viable option for renting one
2. The firms should adopt the option of borrowing the loan and making a warehouse
3. The firm should not use the straight-line depreciation method to determine the value of the asset.