Sensitivity analysis: Home Garden Inc.

Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates:

Construction cost of warehouse

Residual value

Useful life

Estimated annual net cost savings

$$20,000,000to$ $$25,000,000$

$$3,000,000$

$25$ years

$$2,500,000to$ $$4,000,000$

a$.$ Determine the net present value of building the warehouse, assuming a construction cost of $$20,000,000,$ an annual net cost savings of $$4,000,000,$ and a desired rate of return of $14\%.$ Use the Present Value of $$1$ at Compound Interest and Present Value of Ordinary Annuity.

Net present value

b$.$ Determine the net present value of building the warehouse, assuming a construction cost of $$25,000,000,$ an annual net cost savings of $$2,500,000,$ and a desired rate of return of $14\%.$ Use the Present Value of $$1$ at Compound Interest and Present Value of Ordinary Annuity. If required, use the minus sign to indicate a negative net present value.

Net present value $