In: Accounting
Benson Enterprises is evaluating alternative uses for a
three-story manufacturing and warehousing building that it has...
Benson Enterprises is evaluating alternative uses for a
three-story manufacturing and warehousing building that it has
purchased for $1,640,000. The company can continue to rent the
building to the present occupants for $80,000 per year. The present
occupants have indicated an interest in staying in the building for
at least another 15 years. Alternatively, the company could modify
the existing structure to use for its own manufacturing and
warehousing needs. Benson’s production engineer feels the building
could be adapted to handle one of two new product lines. The cost
and revenue data for the two product alternatives are as follows:
Product A Product B Initial cash outlay for building modifications
$ 114,000 $ 144,000 Initial cash outlay for equipment 214,000
249,000 Annual pretax cash revenues (generated for 15 years)
214,000 253,000 Annual pretax expenditures (generated for 15 years)
89,000 109,000 The building will be used for only 15 years for
either Product A or Product B. After 15 years the building will be
too small for efficient production of either product line. At that
time, Benson plans to rent the building to firms similar to the
current occupants. To rent the building again, Benson will need to
restore the building to its present layout. The estimated cash cost
of restoring the building if Product A has been undertaken is
$74,000. If Product B has been manufactured, the cash cost will be
$99,000. These cash costs can be deducted for tax purposes in the
year the expenditures occur. Benson will depreciate the original
building shell over a 30-year life to zero, regardless of which
alternative it chooses. The building modifications and equipment
purchases for either product are estimated to have a 15-year life.
They will be depreciated by the straight-line method. The firm’s
tax rate is 38 percent, and its required rate of return on such
investments is 12 percent. Assume all cash flows occur at the end
of the year. The initial outlays for modifications and equipment
will occur today (Year 0), and the restoration outlays will occur
at the end of Year 15. What is the NPV of the decision to continue
to rent? (Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.) NPV $ What is the NPV for
modifying the building to manufacture Product A? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.) NPV $ What is the NPV for modifying the
building to manufacture Product B? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.) NPV $