Reference no: EM132954246

Problem 1: Century Contracting is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? IRR? What is your decision and why? Briefly discuss results.

Project cost of capital (r)                          10.0%
Opportunity cost                                 $100,000
Net equipment cost (depreciable basis)    $65,000
Straight-line deprec. rate for equipment      33.333%
Sales revenues, each year                        $123,000
Operating costs (excl. deprec.), each year   $25,000
Tax rate                                                      35%