12-7. Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the company owns.

1. Lewisville Company is currently leasing the warehouse to another company for $6,300 per month on a year-to-year basis. (Hint: Use the PV function in Excel to calculate, on an after-tax basis, the PV of this stream of monthly rental receipts.)
2. The warehouses estimated sales value is $232,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $66,500 and is being depreciated at $2,150 annually. Its current net book value (NBV) is $8,150.
3. Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost $165,000 and will be modest because the major attraction will be rock-bottom prices. The remodeling cost will be depreciated over the next 5 years using the double-declining-balance method. (Note: Use the VDB function in Excel to calculate depreciation charges. The advantage of using the VDB, rather than the DDB, function is that there is a (default) option in the former that provides an automatic switch to the straight-line method when it is advantageous to do so.)
4. The inventory and receivables (net of current liabilities) needed to open and sustain the factory outlet would be $700,000. This total is fully recoverable whenever operations terminate.
5. Lou is fairly certain that the warehouse will be condemned in 10 years to make room for a new highway. The firm most likely would receive $265,000 from the condemnation.
6. Estimated annual operating data, exclusive of depreciation, are as follows:

Sales (cash)		$965,000
Operating expenses		$565,000

7. Nonrecurring sales promotion costs at the beginning of year 1 (i.e., time 0) are expected to be $120,000. (These costs are fully deductible for tax purposes.)
8. Nonrecurring termination costs at the end of year 5 are $63,000. (These costs are fully deductible for tax purposes.)
9. The after-tax discount rate for capital budgeting purposes is 11%. (To calculate the present value factor for each year, i, i = 1, 5, use the following formula: PV factor_i = (1 1.11ⁱ). The company is in the 34% tax bracket (federal and state combined).

Required:

1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to calculate depreciation tax savings.

Cash Flows in Year 2 Item PV 0 1 b. Description After-tax monthly rent foregone All are irrelevant Remodeling cost (capitalized) Depreciation tax savings (DDB method; @34%) Investment in net working capital Recovery of net working capital After-tax cash sales After-tax cash operating expenses After-tax sales promotion cost, year 0 After-tax termination cost, year 5 III d. h. NPV- Cash Flows in Year 2 Item PV 0 1 b. Description After-tax monthly rent foregone All are irrelevant Remodeling cost (capitalized) Depreciation tax savings (DDB method; @34%) Investment in net working capital Recovery of net working capital After-tax cash sales After-tax cash operating expenses After-tax sales promotion cost, year 0 After-tax termination cost, year 5 III d. h. NPV