Electronic Products Ltd$.($EPL$)$ is considering whether to construct a new warehouse for its

operations. The base construction cost for the warehouse is $$650,000,$ but fixtures and fittings

will cost an additional $$575,000.$ The warehouse will be built on land EPL purchased for

$$200,000$ a few years ago, and which is currently worth $$375,000.$ Although the value of the

land is expected to double over the $10$year life$$span of the warehouse, the warehouse is

expected to be worth only $70\%$ of their construction cost at the end of that period, while the

fixtures and fittings will have no value.

EPL has previously paid Monty Consulting $$148,000$ to design the warehouse and has arranged

to finance the cost of the construction with a $12\%$ p$.$a$.$ interest$$only loan requiring payments of

$$180,000$ per year. The company$$s bookkeeper has advised that Monty Consulting$$s fee should

be spread over the $10$year life of the project.

If EPL constructs the new warehouse, it will save $$62,000$ per year in rent on its current

warehouse premises, but operating expenses will increase from $$363,000$ per year to $$510,000$

a year. However, relocating to the new warehouse is expected to increase sales revenues by

$$230,000$ per year over the $10$year life of the warehouse, while the company$$s office staff costs

of $$264,000$ per year will not change.

EPL has determined that it will be able to sell one of its delivery trucks today if it moves to the

new warehouse. In that case, it plans to sell the oldest truck in its fleet, which is fully

depreciated for tax purposes and could be sold for $$8,000.$ Doing so would decrease the fuel

and maintenance costs of the fleet from $$850,000$ per year to $$785,000$ per year. It would also

yield a wage saving of $$76,000$ per year, due to the reduction of deliveries. In addition, moving

to the new warehouse would yield a once$$off reduction in inventory of $$970,000.$

EPL wants to depreciate all assets over the ten$$year life of the warehouse. However, the tax

advice it has received is that the fixtures and fittings can be depreciated over $10$ years, for tax

purposes, but the warehouse must be depreciated over $50$ years, and the land cannot be

depreciated for tax purposes.

Answer the following questions, given that EPL$$s tax rate is $30\%,$ and the required rate of return

is $16\%$ per annum:

$($a$)$ What are the cash flows at the start?

$($b$)$ What are the cash flows during the life?

$($c$)$ What are the cash flows at the end?

$($d$)$ What is the NPV of the warehouse project, and should EPL go ahead with it$?$