Reference no: EM131835367

Bearcat Builders is planning to construct a new warehouse. You obtained the following information related to the project from the company CFO

Cost of warehouse $8,000,000

Estimated useful life of warehouse 10 years

Salvage value of warehouse $1,000,000

Annual cash inflows from project $4,000,000

Annual cash outflows from project $3,000,000

Required rate of return 8%

The company CEO is an advocate of building the new warehouse and she believes the CFO’s numbers understate the potential value of the new warehouse. She feels that additional sales will increase the annual cash inflows by $250,000 and the annual cash outflows will be $250,000 lower due to more efficient utilities. She also feels that the new facility is not as risky as denoted by the 8% required rate of return and suggested that the required rate of return should be 6%.

Note: Ignore the impact of taxes and the depreciation tax shield. The company uses the straight-line depreciation method.

Required

Calculate the net present value of the project based on the original CFO projections.

Calculate the net present value of the project based on the CEO’s projections of increased annual cash flows and reduced annual cash outflows while still using the 8% required rate of return.

Calculate the net present value of the project based on the CFO’s original projections of annual cash inflows and outflows but using the 6% required rate of return suggested by the CEO.

Calculate the net present value of the project based on the CEO’s projections of increased annual cash flows and reduced cash outflows while using the 6% required rate of return.

Calculate the payback period of the project based on the original CFO projections used in requirement 1.

Based on your calculations summarize your findings and make a recommendation to the CEO. Provide appropriate discussion that relates to her concerns regarding the information provided by the CFO.