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Capital budgeting decision on new branch

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Reference no: EM131419800

Capital budgeting decision on new branch

  • Initial cost of building and equipment is $1 million
  • Expected to have a useful life of 20 years
  • At the end of the project the building and its equipment are expected to be sold for a $200,000 salvage value
  • The building and its equipment will be depreciated over their 20-year life using straight-line depreciation to a zero balance
  • The building is to be constructed on land leased for $23,000 per year
  • Net working capital must be increased by $110,000
  • Annual revenues from the new branch will be $400,000
  • Of this $400,000 in revenues, $50,000 will be drawn away from the bank's main office
  • The new branch will incur about $130,000 per year in other expenses
  • Both expenses and revenues are expected to remain approximately constant over the branch's 20-year life
  • Marginal tax rate is 40%
  • Cost of capital 9%

Answer the following questions:

1. What is the cash flow for the branch's 20-year life

2. Calculate the NPV, Profitability index, and Internal rate of return (IRR).

3. Should the project be accepted? Why?

Reference no: EM131419800

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