Capital budgeting decision on new branch.

• 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?

1) 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 salva The building and its equipment will be depreciated over their 20-year life using straight-line deprec 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 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-ye 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? discount rate ?? net investment Net investment Plus: chg in nwc net Investment ?? ?? ?? salvage value depr ?? ?? Net cash flow revenue less: draw by bank less:lease less: oper cost less: depr ?? ?? ?? ?? ?? year cash flow 0 1 2 3 4 5 6 ?? ?? ?? ?? ?? ?? ?? 7 ?? 8 9 10 11 12 ?? ?? ?? ?? ?? earning before tax less tax earning after tax plus: depr net cash flow ?? ?? ?? ?? ?? project cash flow net investment net cash flow year 1-19 year 20 cash flow from salvage sale from net working ca less: tax of salvage total ?? ?? ?? ?? ?? ?? ?? ?? 13 14 15 16 17 18 ?? ?? ?? ?? ?? ?? 19 ?? 20 ?? NPV ?? profitabilit ?? IRR ?? yes / no ?? o be sold for a $200,000 salvage value life using straight-line depreciation to a zero balance ank's main office nstant over the branch's 20-year life