Question

5.10 you need to know whether the building of a new warehouse is justified under the following conditions.

-The proposals for a warehouse costing $250,000.

-The warehouse has an expected useful life of 35 years and a net salvage value (net proceeds from sale after tax adjustments) of $50,000.

-Annual receipts of $67,000 are expected, annual maintenance and administrative costs will be $12,000/year, and annual income taxes are $15,000.

Given the foregoing data, which of the following statements are correct?

(a) The proposal is justified for a MARR of 15%.

(b) The proposal has a net present worth of -$50,254 when 20% is used as the interest rate.

(c) The proposal is acceptable as long as MARR <= 15.93%.

(d) All of the preceding are correct.

Please show givens and all work.

Answer 1

ans....
Option D is correct.

a) NPV is positive if 15% rate is used so the project is justified.

b) If we assume interest rate of 20% then NPV turns out to be negative which is -50253.95 or -50254 rounded off.

c) As its NPV is zero at the rate 15.93%, project is acceptable as long as rate is below that.