Question
A firm is developing a building. Lights need to be installed in each part of the job. The firm must either pay a team to
A firm is developing a building. Lights need to be installed in each part of the job. The firm must either pay a team to install the lights or else install the lights themselves. If the developer installs the lights themselves, they will need to purchase a large storage container for the lights and installation materials. The storage container will cost $30,000 and be depreciated over 3 years on a straight-line basis. Also, the developer will need to purchase $1,000 of new inventory, $500 of which will be on accounts payable. It will take three years to install all the streetlights in this development and the cost to install the lights will be $2,000 per year. When the project is over, the developer plans to sell the storage container for $5,000 and return the inventory and accounts payable to pre-project levels. The developers tax rate is 21%. Hiring a subcontractor will cost the developer $11,000 per year. If the developers weighted average cost of capital is 15%, what is the NPV of the developer installing the streetlights themselves? What is the IRR? Should the developer install the lights themselves or hire a subcontractor to do it?
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