Earnings Estate is considering 2 sites for its development project. The company’
ID: 2456344 • Letter: E
Question
Earnings Estate is considering 2 sites for its development project. The company’s management has put together the cash flow estimates and other data for each site:
Site 1
Site 2
Plano Legacy
Grapevine Express
Land and construction costs
$5,100,000
$6,400,000
Annual cash inflows
670,000
725,000
Annual cash outflows
98,000
125,000
Estimated useful life (in years)
21
26
Interest rate
10%
8%
The company expects the Plano Legacy site to have a $2,000,000 salvage value at the end of its useful life and the Grapevine Express site to have a $3,000,000 salvage value at the end of its useful life.
What is the net present value of each site and which site would be the preferred investment?
Site 1
Site 2
Plano Legacy
Grapevine Express
Land and construction costs
$5,100,000
$6,400,000
Annual cash inflows
670,000
725,000
Annual cash outflows
98,000
125,000
Estimated useful life (in years)
21
26
Interest rate
10%
8%
Explanation / Answer
Answer: Calculation of depreciation using the SLM:
Plano Legacy=($5100000-$2000000)/21=147619
Grapevine Express=($6400000-$3000000)/26=130769.23
Calculation of NPV:
Grapevine Express site should be preferred because its NPV is higher than Other NPV.
Plano Legacy Particulars Time P.V.F (10%) Amount ($) PV ($) Land and construction cost 0 1 -5100000 -5100000 Net annual cash inflow (670000-98000) 1-21 8.6487 572000 4947056 Salvage value 21 0.13513 2000000 270260 NPV 117316.4Related Questions
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