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Zippo is considering purchasing a fully-automated warehouse. As a result, the expected annual operating costs are expected be $600,000 less for the next twenty years.
Zippo is considering purchasing a fully-automated warehouse. As a result, the expected annual operating costs are expected be $600,000 less for the next twenty years. The acquisition cost of the warehouse is $6,000,000. The company uses the straight-line method of deprecation. The new warehouse has an expected useful life of 20 years, after which the expected salvage value is zero. The existing warehouse has a net book value of $2,400,000, a remaining useful life of 20 years, and a zero salvage value at that time. If the warehouse is sold today, management believes they would receive $800,000 Management determined that the required rate of return for projects of this risk is 10% (minimum accounting return is also 10%) and that the maximum payback period is 8 years. Assume a tax rate of 40%. 1. Sketch the project cash flows 2. Analyze the project using each of the following quantitative approaches: net present value, payback period, accrual accounting rate of return, discounted payback period, and internal rate of return. 3. Based solely on quantitative factors, should Zippo undertake this project? Why or why not
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