A company is considering investing $350,000 in surface land rights and $600,000 in a steel warehouse building with both costs incurred at time zero. Manufacturing equipment costing $400,000 would be installed at time zero to generate carwash units to be delivered across the country. Spare parts and product inventory are estimated at $500,000 also at time zero. Depreciate the building starting in year 1 by the straight line method over 39 years assuming depreciation using 5-year MACRS rates starting in year 1, while the land and working capital expenditures will be written off with all other remaining book values against the sale of the business at the end of year 5. Product sales in each of years 1-5 are estimated to be $4,500,000 per year with cost of goods sold estimated at $2,500,000 past year. Sales and operating expenses are forecasted to remain uniform over the project life. Your company would hope to sell the business at the end of year 5 for $15,000,000 net of all closing costs. The company uses an after-tax minimum rate of return of 15%. The effective state and federal income tax rate is 40% and other income is thought to exist against which to use all deductions.
1. Use NPV analysis to determine if this business venture should be undertaken,
2. When does the project achieve payback?
3. Based on car wash equipment sale of 2 units per week for 50 weeks per year, what price per complete car wash unit would allow the business to generate an after-tax escalated dollar return of 15% on the invested capital?
4. How much more could be spent today (time zero) on 5 year MACRS depreciable equipment and still earn a 15% after-tax return? Use the 5-year business model for this calculation.