It is 1 9 8 5 and your manager, Luisa, has requested you evaluate a potential investment
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Question:
It is and your manager, Luisa, has requested you evaluate a potential investment option.
The expansion would create a second location for Luisas Surf Shop in Malibu. Three years ago, Luisa purchased the land in Malibu that the new shop would reside on for $ The new shop will cost $ to open, resulting in annual operating revenues of $ for the next eight years and require annual operating costs of $ each year. After eight years, Luisa expects to sell the property for $ The new building will be depreciated over years. Luisa estimates she will need to purchase an additonal $ in inventories, alongside increasing her accounts receivable by $ and accounts payable by $ to support the new shop. Additionally, Luisa expects the new location to decrease sales at the existing location by $ every year as the two locations serve some of the same customer base. Luisa was recently quoted a loan rate of by her local bank branch manager and is subject to a tax rate. If Luisa does not pursue the second location, she could rent the land to food trucks that service the surfing community for $ per year.
Luisa has asked that you estimate the future cash flows and calculate the net present value of this potential expansion under both straightline and MACRs depreciation. Additionally, she requests that you explain what the difference is between these two depreciation measures, why it matters to her, and whether should she pursue the expansion under either depreciation regime.
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