Pete’s Plumbing Supplies would like to expand into a new warehouse at a cost of \($500,000.\) The warehouse is expected to have a life of 20 years, and a salvage value of \($100,000.\) Annual costs for maintenance, insurance, and other cash expenses will total \($60,000.\) Annual net cash receipts resulting from this expansion are predicted to be \($115,000.\) The company’s required rate of return is 12 percent.

Required

a. Find the net present value of this investment using the format presented in Table 8.3. Round to the nearest dollar.

b. Should the company purchase the new warehouse? Explain.

c. Provide one qualitative factor that might cause the company to reach a different conclusion than the one reached in requirement b.

Table 8.3

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Alternative NPV Calculation for Jackson's Quality Copies (A) Cash Flow (B) Present Value Item Description In (Out) Factor (r10%) Purchase price (today) $(50,000) 1.000* Annual maintenance costs (years 1-7) (1,000) 4.8684** Annual labor savings (years 1-7) 11,000 4.8684** Salvage value (end of year 7) 5,000 0.5132* Net present value (A) x (B) Present Value $(50,000) ( 4,868) 53,552 2,566 $ 1,250 Same as NPV in Table 8.2 * Because this is not an annuity, use Table 1 in Appendix 8.1. ** Because this is an annuity, use Table 2 in Appendix 8.1. The number of years (n) equals seven since identical cash flows occur each year for seven years.