Jenny's Flower Shop decides they want to expand operations and is looking for a larger facility. She can either add an addition onto her current building or sell the building she currently owns and lease a facility down the street. Assume her cost of capital is 14% and her tax rate is 20% Option #1: If Jenny adds onto her current building, she estimates it will cost her $150,000 today. She will depreciate the improvements using straight line depreciation, with an estimated 5 year life and no salvage value. She expects her estimated operating revenues (cash) to increase by $100,000 per year, with operating (cash) costs increasing by $20,000 each year. At the end of year 2, she also anticipates an additional maintenance charge (cash expense) to her current flower coolers of $25,000. At the end of 5 years, she plans to retire and sell the building for $600,000. Calculate the NPV, including tax effects Show all of your work for Option #1 (including tax effects). 1 1 Present Value of $1 Period 14% 0.877 2 0.769 3 0.675 4 0.592 5 0.519 Present Value of an Annuity of $1 Period 14% 0.877 2 1.647 3 2.322 4 2.914 5 3.433 Option #2: If she sells the building today (as-is), she thinks she can sell it for $200,000 but will need to lease a larger facility down the street for approximately $40,000 per year. She anticipates her revenues will increase by $115,000 per year and additional operating costs (not include the $40,000 in annual rent) will be $15,000 each year. She will also need to renovate the current space (a leasehold improvement) today for approximately $50,000. She will depreciate the leasehold improvements using straight line depreciation, with no salvage value. At the end of the lease term, she expects to sell the leasehold improvements for $5,000. Calculate the NPV, including tax effects. Show all work below to analyze Option 2 (including tax effects) 1 Present Value of $1 Period 14% 1 0.877 2 0.769 3 0.675 4 0.592 5 0.519 Present Value of an Annuity of $1 Period 14% 0.877 2 1.647 3 2.322 4 2.914 5 3.433