Question

Bank of XYZ is considering the establishment of a new branch office on Main Street The bank’s economics department projects annual operating revenues of $413,664 from fee income generated by service sales and annual branch operating expenses of $179,553. The cost of procuring the property is $417,976 and branch construction will total an estimated $3,235,407; the facility is expected to last 31 years. If the bank has a minimum acceptable rate of return on its invested capital of 0.13, what is the NPV of this branch office project?

Answer 1

Initial investment = Cost of procuring the property + Brach construction.

Initial investment = $417,976+$3,235,407

Initial investment = $3,653,383

Net annual cash inflow = Annual branch operating Revenues - Annual branch operating expenses

Net annual cash inflow = $413,664-$179,553

Net annual cash inflow = $234,111

NPV = {Net annual cash inflow * Present value annuity factor (13%,31 years)} - Initial investment

NPV = $234,111*7.5183-$3,653,383

NPV = $1,760,116-$3,653,383

NPV = -$1,893,267