The owner of Midwest Grocers Warehouse is considering a $ 195,000 installation of a new refrigerated storage

Question:

The owner of Midwest Grocer’s Warehouse is considering a $ 195,000 installation of a new refrigerated storage room. The storage room has an expected life of 20 years with no salvage value. The storage room is expected to generate net annual cash revenues (before tax, labor, utility, and maintenance costs) of $ 46,000 and would increase annual labor, utility, and maintenance costs by $ 21,000. The firm’s cost of capital is 9 percent, and its tax rate is 30 percent.

a. Using straight-line depreciation, calculate the after-tax net present value of the storage room.

b. Based on your answer to (a), is this investment financially acceptable? Explain.

c. What is the minimum amount by which net annual cash revenues must increase to make this an acceptable investment?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...