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 Lewisville Company is currently leasing the warehouse to another company for $6,500 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 monthly rental receipts ) The warehouses estimated sales value is $237,000 A commercial realtor believes that the price is likely to remain unchanged in the near future The building originally cost $67,500 and is being depreciated at $2,250 annually Its current net book value (NBV) is $8,250 Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture The remodeling will cost $175,000 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 $715,000 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 $275,000 from the condemnation Estimated annual operating data, exclusive of depreciation, are as follows Sales (cash) $ 975,000 Operating expenses $ 575,000 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

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Posted on Sep 08, 2024

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.

Lewisville Company is currently leasing the warehouse to another company for $6,500 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 monthly rental receipts.)
The warehouses estimated sales value is $237,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $67,500 and is being depreciated at $2,250 annually. Its current net book value (NBV) is $8,250.
Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost $175,000 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 $715,000. 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 $275,000 from the condemnation.
Estimated annual operating data, exclusive of depreciation, are as follows:


Sales (cash)	$	975,000
Operating expenses	$	575,000

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.