Fantastic Flooring (FF) is a carpet wholesale company. FF is considering building a new inventory warehouse for $500,000. The warehouse would allow FF to increase their pre-tax cash flows by $100,000 each year. The company would plan to use the warehouse for 10 years before selling it for $200,000. The company uses straight-line depreciation. FF's tax rate is 20%, and the required rate of return is 10%.
What is the Net Present Value of the proposed investment?

Question

Quizplus · Accepted Answer

After-tax Cash inflow: $100,000 × (1 - 0.20) = $80,000
Annual depreciation: ($500,000 - $200,000)/10 = $30,000
Depreciation tax shield: $30,000 × 0.20 = $6,000
Total net cash flow: $80,000 + $6,000 = $86,000
PV of annuity: $86,000 × 6.14457 (10 years, 10%) = $528,433.02
Cash flow impact of disposal value:
Proceeds: $200,000
Gain/loss on sale: ($200,000 proceeds - $200,000 book value) × 0.20 = $0
Net cash flow impact of disposal value: $200,000 + $0 = $200,000
PV of disposal value: $200,000 × 0.38554 (10 years, 10%) = $77,108.00
Present Value of future cash flows: $528,433.02 + $77,108.00 = $605,541.02
Net Present Value: $605,541.02 - $500,000 = $105,541.02

Fantastic Flooring (FF) Is a Carpet Wholesale Company