139 C D Question 3: Capital Budgeting II Universal Farm Supply's management has observed that it can sell as much fertilizer as it can stock and is considering the possibility of purchasing a forklift and expanding its warehouse space in order to be able to handle and stock more fertilizer (both are necessary to expand sales). The forklift costs $42,000 and would be depreciated to a salvage value of zero in 7 years, even though it is expected to last for 10 years. The warehouse expansion would cost $100,000 and would be depreciated to a salvage value of $60,000 in 10 years. The expansion would allow Universal to sell 1,000,000 more pounds per year at $0.20 per pound (the fertilizer actually costs Universal $0.17 per pound to manufacture). Universal's marginal tax rate is 29% and its required rate of retum is 12%. Assume the firm uses straightline depreciation $ $ Forklift Warehouse 42,000.00 $ 100,000.00 $ 60,000.00 7 10 10 11 12 13 14 15 16 17 Cost Salvage Value Life Depreciation Sales Increase Price Per Pound Cost Per Pound Profits Tax Rate Required Return $ $ 1,000,000 0.20 0.17 25% 12% Year One Time CF Profits Depreciation Taxes After Tax CF PV Hint: This is your initial cost right now 20 21 22 23 24 25 26 27 0 1 2 3 4 5 6 7 8 Instructions Your Info 01 Q2 Q3 Ready One Time CF Profits Depreciation Taxes After Tax CF PV Hint: This is your initial cost right now Year 0 1 2 3 4 5 6 17 19 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 -35 36 37 38 39 7 B 9 10 Hint: Don't forget that salvage valuel A: What is the initial cash outlay associated with the expansion? Initial Outlay B. What is the net present value of of the expansion? Should Universal expand? NPV Expand? 40 41 42 Hint: Use an IF statement here C-H Universal's required rate of return increased to 20% what would the NPV be? Should Universal expand it their required return increases to 20%? NPV Expand? Hint: Use on IF statement here D. What is the internal rate of return of the expansion? 24 45 to IRR 50