Warehouse Project Analysis for Warehouse Expansion - Finance Report

This report provides a comprehensive analysis of a warehouse project, focusing on the calculation of Net Present Value (NPV) to determine its economic feasibility. The report details the key assumptions made, including the treatment of sunk costs, working capital, and equipment depreciation. It explains the rationale behind the NPV calculations and presents the results, which indicate a positive NPV for the project. Based on these findings, the report recommends that the company should proceed with the warehouse project, as it is expected to increase shareholder wealth. The report also highlights the impact of the project on the company's operations and financial performance.

FINANCIAL MANAGEMENT
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Recommendation
As per the information provided, it is apparent that the business currently has a warehouse
which is running at 100% capacity and hence customers have to be turned away routinely.
There is a proposal to develop a new warehouse on the adjacent land block that also belongs
to the business. The objective of this analysis is to provide recommendation to the
shareholders with regards to the warehouse project on the basis of NPV analysis. The key
assumptions and working for computation of NPV are summarised below.
1) An assumption has been made that in case of rejection of warehouse project, immediate
liquidation of land would be done. However, in case of proceeding with the project, the
land would be sold only after five years.
2) No interest payments or loan repayments have been represented in the computation of
NPV as the rate of return is supposed to reflect the underlying cost of financing of the
project.
3) The cost to company for Jacob’s foreign trip has not been considered since it is a sunk cost
which cannot be recouped even if the warehouse project is scrapped.
4) Another assumption made is that the extra amount put in as working capital for the new
warehouse will be recovered at the project end and hence during NPV computation, the
corresponding cash flow has been reflected.
5) Also, it has been assumes that the incremental investment in the form of equipment and
structure erected would be sold once the project is finished and hence corresponding cash
flows have been included in NPV computation.
6) The old equipment whose book value is zero but market value $ 10,000 at t=0 is assumed
to have zero market value at t=5. But still depreciation charged is zero since book value is
already zero.
7) It has been assumed that all project related cash flows would occur only at year end and
hence discounting has been done in accordance with the above assumption.
For the proposed warehouse project, the computation of NPV has been indicated as shown
below.

In accordance with the NPV related calculations which are shown above, it is evident that the
NPV for the new warehouse project is coming out to be positive. A positive NPV implies the
economic feasibility of the project and the fact that undertaking the same would lead to
increase in shareholders’ wealth. Therefore, the new warehouse should be set up on the
vacant land.