Reference no: EM132539666

Point 1: Pepega Investments is evaluating a proposal to build a new warehouse. The warehouse will increase Pepega's annual revenue by $3,000,000, but it will also increase annual maintenance costs by $150,000. In addition, the company would have to hire additional staff to run the warehouse, at a cost of $350,000 per year.

Point 2: It will cost $5,000,000 to construct the warehouse. The tax office has ruled that the building could be depreciated over 15 years, straight-line. The land on which the warehouse would be built has an appraised market value of $450,000 and is not a depreciating asset.

Point 3: Pepega regards the warehouse proposal as a 10-year project. At the end of that period, it is expected that the building would be worthless. However, it is expected that the land will have doubled in value after 10 years. Selling the land at that time would have no tax implications. Pepega is taxed at 30% on its taxable income.

Question 1: What are the total annual cash flows over the life of the project?

Option 1: $2,600,000

Option 2: $1,750,000

Option 3: $1,850,000

Option 4: None of the other answers is correct

Option 5: $2,083,333