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 $33\%$ effective tax rate.

Lewisville Company is currently leasing the warehouse to another company for $$6,400$ 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 monthly rental receipts.$)$

The warehouse$$s estimated sales value is $$235,000.$ A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $$67,000$ and is being depreciated at $$2,200$ annually. Its current net book value $($NBV$)$ is $$8,200.$

Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost $$170,000$ 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 $$705,000.$ 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 $$270,000$ from the condemnation.

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

Sales $($cash$)$ $ $970,000$

Operating expenses $ $570,000$

Nonrecurring sales promotion costs at the beginning of year $1($i$.$e$.,$ at time $0)$ are expected to be $$121,000.($These costs are fully deductible for tax purposes.$)$

Nonrecurring termination costs at the end of year $5$ are $$64,000.($These costs are fully deductible for tax purposes.$)$

The after$-$tax discount rate for capital budgeting purposes is $14\%.($To calculate the present value factor for each year, i$,$ i $=1,5,$ use the following formula: PV factori $=(1-$: $1\mathrm{.}14$i$).$ The company is in the $33\%$ 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.

$2.$ Indicate which course of action, based only on these data, should be taken.