Construction cost of warehouse Residual value Useful life Estimated annual net cost savings Rate of return PV factor for ordinary annuity PV factor for lump sum Conservative Estimate $5,000,000 $ 0.00 25 years $450,000 10% 9.077 0.092 Most Likely Optimistic Estimate Estimate $4,5000,00 0 $180,000.00 25 years $585,000 12% 7.843 0.059 $4,250,000 $212,500.0 0 25 years $765,000.0 0 14% 6.873 0.038
Construction cost of warehouse Residual value Useful life Estimated annual net cost savings Rate of return PV factor for ordinary annuity PV factor for lump sum Conservative Estimate $5,000,000 $ 0.00 25 years $450,000 10% 9.077 0.092 Most Likely Optimistic Estimate Estimate $4,5000,00 0 $180,000.00 25 years $585,000 12% 7.843 0.059 $4,250,000 $212,500.0 0 25 years $765,000.0 0 14% 6.873 0.038
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Everyone was affected by the economic impacts of COVID-19 including nonprofits. Donations plummeted and volunteers dried up but the community's need for help only grew. The table below provides information for the Transformation Station, a nonprofit that focuses on people experiencing homelessness for the first time. Transformation Station has determined they need a bigger storage facility. They first need to perform a sensitivity analysis to determine whether to build a larger storage facility. Part 1: Perform a sensitivity analysis (aka net present value ) for the three options above. Show work
Part 2: Remember that we have very little control over whether the Conservative, Most Likely, or Optimistic Estimate is realized. In other words, this analysis is similar to saying, "Well, we don't know exactly how much it will cost or how much you will save. However, we have done some analysis - based on the current economic environment - and we believe it will be somewhere between the Conservative and Optimistic Estimate." Answer Part 2 based on this knowledge.
If you were the director of the Transformation Station, would you build the warehouse? Why? Remember that the economy is volatile. While we have three estimates (conservative, most likely, and optimistic), the reality of our outcome is dependent on the economy which we have little control over.
Transcribed Image Text:Construction cost of
warehouse
Residual value
Useful life
Estimated annual net cost
savings
Rate of return
PV factor for ordinary
annuity
PV factor for lump sum
Conservative Most Likely Optimistic
Estimate
Estimate
Estimate
$4,5000,00
0
$5,000,000
$ 0.00
25 years
$450,000
10%
9.077
0.092
$180,000.00
25 years
$585,000
12%
7.843
0.059
$4,250,000
$212,500.0
0
25 years
$765,000.0
0
14%
6.873
0.038
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