Reference no: EM132890371
Question - A toy company is considering constructing a new building in order to be able to continue its activities more efficiently.
The construction costs of the building (depreciable at 10%) and the purchase of the land amount to $400,000 and $100,000 respectively. Today, the current building is worth $75,000 but only $10,000 in 20 years and the land is worth $100,000 but $200,000 in 20 years. We think we can resell them at these amounts after 20 years, namely $10,000 and $200,000.
For the existing building to last another 20 years, repair expenses of $ 100,000 would have to be incurred at the start of the tenth year (expense that can be capitalized in the same category as the building). The reorganization of production would result in a pre-tax saving of $70,000 per year for 10 years and $75,000 per year for the following 10 years. The working capital requirement would increase by $10,000 at the start of the project, the tax rate is 40% and the discount rate is 12%.
1) Calculate the VAN of this project taking into account all tax implications. Break down your calculations by "life" stage of the investment.
2) Would you recommend that the company undertake this project?