Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased
Question:
Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,610,000. The company can continue to rent the building to the present occupants for $77,000 per year. The present occupants have indicated an interest in staying in the building for at least another 15 years. Alternatively, the company could modify the existing structure to use for its own manufacturing and warehousing needs. Benson’s production engineer feels the building could be adapted to handle one of two new product lines. The cost and revenue data for the two product alternatives are as follows: |
Product A | Product B | ||||
The initial cash outlay for building modifications | $ | 111,000 | $ | 141,000 | |
The initial cash outlay for equipment | 211,000 | 246,000 | |||
Annual pretax cash revenues (generated for 15 years) | 208,000 | 247,000 | |||
Annual pretax expenditures (generated for 15 years) | 86,000 | 106,000 | |||
|
Benson will depreciate the original building shell (purchased for $1,610,000) over a 30-year life to zero, regardless of which alternative it chooses. The building modifications and equipment purchases for either product are estimated to have a 15-year life. They will be depreciated by the straight-line method. The firm’s tax rate is 40 percent, and its required rate of return on such investments is 14 percent. |
For simplicity, assume all cash flows occur at the end of the year. The initial outlays for modifications and equipment will occur today (Year 0), and the restoration outlays will occur at the end of Year 15. Benson has other profitable ongoing operations that are sufficient to cover any losses. |
Alternative 1: |
What is the value of NPV of the decision to continue to rent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
Alternative 2: |
What is the value of NPV for modifying the building to manufacture Product A? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
Alternative 3: |
What is the value of NPV for modifying the building to manufacture Product B? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe