Universal Farm Supply's management has observed that it can sell as much fertilizer as it can stock and is considering the possibility of purchasing a forklift and expanding its warehouse space in order to be able to handle and stock more fertilizer (both are necessary to expand sales). The forklift costs $42,000 and would be depreciated to a salvage value of zero in 7 years, even though it is expected to last for 10 years. The warehouse expansion would cost $100,000 and would be depreciated to a salvage value of $60,000 in 10 years. The expansion would allow Universal to sell 1,000,000 more pounds per year at $0.20 per pound (the fertilizer actually costs Universal $0.17 per pound to manufacture). Universals marginal tax rate is 25% and its required rate of return is 12%. Assume the firm uses straightline depreciation.

Forklift Warehouse $ 42,000.00 $100,000.00 $ $ 60,000.00 7 10 Cost Salvage Value Life Depreciation Sales Increase Price Per Pound Cost Per Pound Profits Tax Rate Required Return 1,000,000 $ 0.20 $ 0.17 25% 12% One Time CF Profits Depreciation Taxes After Tax CF PV Hint: This is your initial cost right now Year 0 1 2 3 4 5 6 7 8 9 10 Hint: Don't forget that salvage value! A - What is the initial cash outlay associated with the expansion? Initial Outlay B - What is the net present value of of the expansion? Should Universal expand? NPV Expand? Hint: Use an IF statement here C- If Universal's required rate of return increased to 20% what would the NPV be? Should Universal expand if their required return increases to 20%? NPV Expand? Hint: Use an IF statement here D- What is the internal rate of return of the expansion? IRR