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 $23,000 per year

Net working capital must be increased by $110,000

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

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

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 branch's 20-year life

Marginal tax rate is 40%

Cost of capital 9%

Answer the following questions:

1. What is the cash flow for the branch's 20-year life

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

3. Should the project be accepted? Why?