Capital budgeting decision on new branch
The building is to be constructed on land leased for $21,000 per year Net working capital must be increased by $100,000 Annual revenues from the new branch will be $400,000 Of this $400,000 in revenues, $55,000 will be drawn away from the bank’s main office The new branch will incur about $130,000 per year in other expenses Both expenses and revenues are expected to remain approximately constant over the branch’s 20-year life Marginal tax rate is 40% Cost of capital 9%
Answer the following questions: What is the cash flow for the branch’s 20-year life Calculate the NPV, Profitability index, and Internal rate of return (IRR).
Should the project be accepted?