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?