Bobs Antiques is now considering expanding into new market areas. It is considering opening two new warehouse locations in order to serve its customers in the north and west. Unfortunately, the company only has a sufficient amount of funds to invest into only one warehouse location. The warehouses will require that a new building be constructed. Bobs Antiques expects to use the warehouse for five (5) years before building a new production facility in that area. Outside market research revealed the following:

North West

Estimated first year revenue $650,000 $900,000

Estimated annual revenue growth 7% 5%

Estimated contribution margin 55% 45%

Estimated annual fixed costs $100,000 $120,000

Investment in facility $1,500,000 $1,700,000

Estimated salvage value in year 6 $125,000 $120,000

Assume that the cost of capital is 10% and its tax rate is 40%. Compute the Net Present Value (NPV) for each warehouse consideration. Include the cash flows from salvage value and the tax benefits of depreciation. Evaluate the cash flow, and assume that the company uses the straight-line method for depreciation. Incorporate your research findings, graphs and charts into your presentation for support of your recommendation on which warehouse to construct. Then perform a sensitivity analysis for both warehouses by changing your cost of capital and your contribution margin. Report the results of your sensitivity analysis.