Reference no: EM132235119

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 $22,000 per year
• Net working capital must be increased by $100,000
• 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%
• Discount rate or Cost of capital 9%

Answer the following questions:

1. What is the cash flow for the branch's 20-year life
2. CF0 = Net Initial Investment = Initial cash flow = ??
3. CF1 ... CF19 = cash flow from year 1 to 19 = ??
4. CF20 = cash flow of year 20 = ??
5. Calculate the NPV, Profitability index, and Internal rate of return (IRR).
6. Should the project be accepted? Why?