A retailer company is considering to invest in a distribution center (DC) that s

Question

A retailer company is considering to invest in a distribution center (DC) that serves the east coast. The initial investment is $4,500,000 dollars and the company will make a down payment of 30%, the rest will be financed with a bank loan at 6% interest rate with 20 equal semiannual payments. The annual operating costs estimated for the first year are $420,000, which will increase 5% per year during the next 9 years. The company estimates that the DC will generate annual savings in the transportation costs of $1,200,000 during the first year, and that they will increase at a rate of 3% per year during the life of the project. The distribution center will be sold at the end of the 10^th year at a salvage value of 20% of the original cost. The company MARR is 12%. Perform an investment analysis and make a recommendation to the company about the economical feasibility of investment in the DC. Your analysis must include the following measures of worth: Present worth Annual worth Future worth External rate of return e) Savings/investment ratio

Explanation / Answer

Initial investment -4500000 salvage value -900000 down payment -1350000 Bank loan -3150000 interest on bank loan -94500 year 1 2 3 4 5 6 7 8 9 10 operating cost -420000 -441000 -463050 -486202.5 -510512.625 -536038.2563 -562840.1691 -590982.1775 -620531.2864 -651557.8507 saving Transportation cost 1200000 1236000 1273080 1311272.4 1350610.572 1391128.889 1432862.756 1475848.639 1520124.098 1565727.821 salvage value -900000 net saving 780000 795000 810030 825069.9 840097.947 855090.6329 870022.5868 884866.461 899592.8113 14169.96988 dis factor 0.892857143 0.797193878 0.711780248 0.635518078 0.567426856 0.506631121 0.452349215 0.403883228 0.360610025 0.321973237 696428.5714 633769.1327 576563.3541 524346.8374 476694.1366 433215.5261 393554.0345 357382.7226 324402.1861 4562.351066 Total inflow 4420918.852 Present value -79081.1475 Saving/investment 98.24% Annual worth 442091.8852 rate of return 9.82%

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