Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the company owns. Note: The company has a 38% effective tax rate.

Lewisville Company is currently leasing the warehouse to another company for $5,500 per month on a year-to-year basis. (Hint: Use the PV function in Excel to calculate, on an after-tax basis, the PV of this stream of monthlyrental receipts.)

The warehouses estimated sales value is $212,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $62,500 and is being depreciated at $1,750 annually. Its current net book value (NBV) is $7,750.

Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost $125,000 and will be modest because the major attraction will be rock-bottom prices. The remodeling cost will be depreciated over the next 5 years using the double-declining-balance method. (Note: Use the VDB function in Excel to calculate depreciation charges. The advantage of using the VDB, rather than the DDB, function is that there is a (default) option in the former that provides an automatic switch to the straight-line method when it is advantageous to do so.)

The inventory and receivables (net of current liabilities) needed to open and sustain the factory outlet would be $640,000. This total is fully recoverable whenever operations terminate.

Lou is fairly certain that the warehouse will be condemned in 10 years to make room for a new highway. The firm most likely would receive $225,000 from the condemnation.

Estimated annual operating data, exclusive of depreciation, are as follows:

Sales (cash)	$ 925,000
Operating expenses	$ 525,000

Nonrecurring sales promotion costs at the beginning of year 1 (i.e., at time 0) are expected to be $108,000. (These costs are fully deductible for tax purposes.)

Nonrecurring termination costs at the end of year 5 are $55,000. (These costs are fully deductible for tax purposes.)

The after-tax discount rate for capital budgeting purposes is 15%. (To calculate the present value factor for each year, i, i = 1, 5, use the following formula: PV factor_i = (1 1.15ⁱ). The company is in the 38% tax bracket (federal and state combined).

Required:

1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to calculate depreciation tax savings. (Negative amounts should be indicated by a minus sign. Round your answers to the nearest whole dollar.)