Logan,Inc.is considering the purchase of a warehouse directly across the street from its manufacturing plant.Logan currently warehouses its inventory in a public warehouse across town.Rent on the warehouse and delivering and picking up inventory cost Logan $48,000 per year.The building will cost Logan $400,000.Logan will depreciate the building for 20 years.At the end of 20 years,the building will have a $125,000 salvage value.Logan's required rate of return is 10%.The building's net present value is

Question

Quizplus · Accepted Answer

To calculate the net present value of the building, we need to find the present value of all the cash inflows and outflows associated with it.

Cash outflows:

1. Cost of the building = $400,000

2. Annual depreciation expense = $400,000 / 20 = $20,000 per year

3. Annual property taxes and insurance = $5,000 per year

4. Annual maintenance costs = $2,000 per year

Total cash outflows = $400,000 + ($20,000 + $5,000 + $2,000) x 20 = $688,000

Cash inflows:

1. Annual savings on rent and delivery costs = $48,000 per year

Total cash inflows = $48,000 x 20 = $960,000

Net present value = present value of cash inflows - present value of cash outflows

Using a financial calculator, the present value of the cash inflows is $591,206 and the present value of the cash outflows is $562,978.

Net present value = $591,206 - $562,978 = $28,228

Since the net present value is positive, Logan should purchase the building as it is expected to generate a positive return and create value for the company. The correct answer is B.

Logan,Incis Considering the Purchase of a Warehouse Directly Across the Street