Lou Lewis, the president of Lewisville Company has asked you to give him an analysis of the best use of a warehouse the company owns. The company has a 40% effective tax rate. a. Lewisville Company is currently leasing the warehouse to another company for $5,000 per month on a year-to-year basis. b. The warehouse's estimated sales value is $200,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $60,000 and is being depreciated at $1,500 annually. Its current net book value (NBV) is $7,500. 1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to calculate depreciation tax savings. (complete questions is attached.) Thank you!!! Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the companyowns. Note: The company has a 40% effective tax rate.a. Lewisville Company is currently leasing the warehouse to another company for $5,000 per month on a year-to-year basis. (Hint.Use the PV function in Excel to calculate, on an after-tax basis, the PV of this stream of monthly rental receipts.)b. The warehouse's estimated sales value is $200,000. A commercial realtor believes that the price is likely to remain unchanged inthe near future. The building originally cost $60,000 and is being depreciated at $1,500 annually. Its current net book value (NBV)is $7,500.c. Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost$100,000 and will be modest because the major attraction will be rock-bottom prices. The remodeling cost will be depreciatedover the next 5 years using the double-declining-balance method. (Note: Use the VDB function in Excel to calculate depreciationcharges. The advantage of using the VDB, rather than the DDB, function is that there is a (default) option in the former thatprovides an automatic switch to the straight-line method when it is advantageous to do so.)d. The inventory and receivables (net of current liabilities) needed to open and sustain the factory outlet would be $600,000. Thistotal is fully recoverable whenever operations terminate.e. Lou is fairly certain that the warehouse will be condemned in 10 years to make room for a new highway. The firm most likely wouldreceive $200,000 from the condemnation.f. Estimated annual operating data, exclusive of depreciation, are as follows:Sales (cash)Operating expenses$ 900,000$ 500,000g. Nonrecurring sales promotion costs at the beginning of year 1 (i.e., at time 0) are expected to be $100,000. (These costs are fullydeductible for tax purposes.)h. Nonrecurring termination costs at the end of year 5 are $50,000. (These costs are fully deductible for tax purposes.)i. The after-tax discount rate for capital budgeting purposes is 14%. (To calculate the present value factor for each year, i, i = 1, 5, usethe following formula: PV factor; = (1 ÷ 1.14¹). The company is in the 40% tax bracket (federal and state combined).Required:1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convertit to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function tocalculate depreciation tax savings.2. Indicate which course of action, based only on these data, should be taken.

Net Present Value - An investment proposal's net present value can be calculated by adding up all of…

Answered: Lou Lewis, the president of Lewisville…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 1P

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Lou Lewis, the president of Lewisville Company has asked you to give him an analysis of the best use of a warehouse the company owns. The company has a 40% effective tax rate. a. Lewisville Company is currently leasing the warehouse to another company for $5,000 per month on a year-to-year basis. b. The warehouse's estimated sales value is $200,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $60,000 and is being depreciated at $1,500 annually. Its current net book value (NBV) is $7,500. 1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to calculate depreciation tax savings. (complete questions is attached.) Thank you!!!

Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the company
owns. Note: The company has a 40% effective tax rate.
a. Lewisville Company is currently leasing the warehouse to another company for $5,000 per month on a year-to-year basis. (Hint.
Use the PV function in Excel to calculate, on an after-tax basis, the PV of this stream of monthly rental receipts.)
b. The warehouse's estimated sales value is $200,000. A commercial realtor believes that the price is likely to remain unchanged in
the near future. The building originally cost $60,000 and is being depreciated at $1,500 annually. Its current net book value (NBV)
is $7,500.
c. Lewisville Company is seriously considering converting the warehouse into a factory outlet for furniture. The remodeling will cost
$100,000 and will be modest because the major attraction will be rock-bottom prices. The remodeling cost will be depreciated
over the next 5 years using the double-declining-balance method. (Note: Use the VDB function in Excel to calculate depreciation
charges. The advantage of using the VDB, rather than the DDB, function is that there is a (default) option in the former that
provides an automatic switch to the straight-line method when it is advantageous to do so.)
d. The inventory and receivables (net of current liabilities) needed to open and sustain the factory outlet would be $600,000. This
total is fully recoverable whenever operations terminate.
e. Lou is fairly certain that the warehouse will be condemned in 10 years to make room for a new highway. The firm most likely would
receive $200,000 from the condemnation.
f. Estimated annual operating data, exclusive of depreciation, are as follows:
Sales (cash)
Operating expenses
$ 900,000
$ 500,000
g. Nonrecurring sales promotion costs at the beginning of year 1 (i.e., at time 0) are expected to be $100,000. (These costs are fully
deductible for tax purposes.)
h. Nonrecurring termination costs at the end of year 5 are $50,000. (These costs are fully deductible for tax purposes.)
i. The after-tax discount rate for capital budgeting purposes is 14%. (To calculate the present value factor for each year, i, i = 1, 5, use
the following formula: PV factor; = (1 ÷ 1.14¹). The company is in the 40% tax bracket (federal and state combined).
Required:
1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert
it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to
calculate depreciation tax savings.
2. Indicate which course of action, based only on these data, should be taken.

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