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 $22,000 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

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:

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

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

Should the project be accepted? Why?

	discount rate	??
net investment				year	cash flow
	Net investment	??		0	??
	Plus: chg in nwc	??		1	??
	net Investment	??		2	??
				3	??
	salvage value	??		4	??
	depr	??		5	??
				6	??
Net cash flow				7	??
	revenue	??		8	??
	less: draw by bank	??		9	??
	less:lease	??		10	??
	less: oper cost	??		11	??
	less: depr	??		12	??
	earning before tax	??		13	??
	less tax	??		14	??
	earning after tax	??		15	??
	plus: depr	??		16	??
	net cash flow	??		17	??
				18	??
project cash flow				19	??
	net investment	??		20	??
	net cash flow	??
	year 1-19	??
				NPV	??
	year 20
	cash flow	??		profitability index	??
	from salvage sale	??
	from net working capital	??		IRR	??
	less: tax of salvage	??
	total	??		yes / no	??