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Page 2 of 8 QUESTION 1 Benson Enterprises is evaluating altenative uses for a three-story manufacturing and warehousing building that it has purchased for $850,000. The company can continue to rent the building to the present occupants for $36,000 per year. The prescot occupants ave indicated an interest in staying in the building for at least another 15 years Altenati manufacturing and warehousing needs. Benson's production engineer feels could be adapted to handle one of two new product lines. The cost ely, the company could modify the existing structure to use for it's owns the building and revenue data for the two product alternatives are as follows Initial cash Outlay for building modifications Initial cash outlay for equipment Annual pretax cash revenues (generated for 15 years) Annual pretax expenditures (generated for 15 years) Product A Product B $45,000 $65,000 165,000 205,000 5,000 60.000 75.000 135,000 16 The building will be used for only 15 years for either product A or product B. After 1S years the building will be too small for efficient production of either product line. At time, Benson plans to rent the building to firms similar to the current occupants. To rernt the building again, Benson will ned to restore the building to its present layout. T estimated cash cost of restoring the building if product has been undertaken is $29,000 If product B has been manufactured, the cash cost will be $35,000. These cash costs can be deducted for tax purposes in the year the expenditures occur. that Benson will depreciate the original building shell (purchased for $850,000) over a 30- year life to zero, regardless of which alternative it chooses. The building modifications and equipment purchases for either product are estimated to have a 15-year life. The will be depreciated by the straight-line method. The firm's tax rate is 34 percent, and its required rate of return on such investment is 12 percent. Required: For simplicity assume all cash flows occur at the end of the year. The initial outlay for modification and equipment will occur today (year 0), and the restoration outlays will occur at the end of year 15. Benson has other profitable ongoing operations that are sufficient to cover any losses. Which use of the building would you recommend to management? (25 marks) The Unis of the West Indics INBA 6375 December 2014