4)Capital budgeting decision on new branch

Initial cost of building and equipment is $1 million

Expected to have a useful life of 20 years

At the end of the project the building and its equipment are expected to be sold for a $200,000 salvage value

The building and its equipment will be depreciated over their 20-year life using straight-line depreciation to a zero balance

The building is to be constructed on land leased for $20,000 per year

Net working capital must be increased by $100,000

Annual revenues from the new branch will be $400,000

Of this $400,000 in revenues, $50,000 will be drawn away from the banks main office

Net working capital must be increased by $100,000

The new branch will incur about $130,000 per year in other expenses

Both expenses and revenues are expected to remain approximately constant over the branchs 20-year life

Marginal tax rate is 40%

Cost of capital 9%

Answer the following questions:

1.What is the cash flow for the branchs 20-year life

2.Calculate the NPV, Profitability index, and Internal rate of return (IRR).

3.Should the project be accepted?

2)Capital budgeting An investment requires an outlay of $100,000 today. Cash inflow from the investment are expected to be $40,000 per year at the end of year 4, 5, 6, 7, and 8. You require a 20% rate of return on this type of investment. Answer the following questions: a.First draw the time line and specify the cash outflow and inflow for each period. b.Calculate the net present value. c.Calculate the Internal rate of return of this investment. d.Calculate the payback periods e.Shall the investment be undertaken?