Question

Management at TJX Companies is deciding whether to build a new goods distribution center. The distribution center will cost $60 million to build; the estimated additional first year revenue will be $5 million. The distribution center will last 50 years, with a depreciation rate of 5% per year. The opportunity cost of this investment is predicted to be 7% interest earned. a. What is the present value of the stream of payments resulting from this potential new goods distribution center? Round to the nearest million. $ million b. TJX build the distribution center because the .

Answer 1

Answer:

PV= $69,003,731.47

Explanation:

Giving the following information:

Cash flows= $5,000,000 for 50 years

Opportunity cost= 7%

First, we need to calculate the Future Value of the cash flow stream using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual cah flow

FV= {5,000,000*[(1.07^50) - 1]} / 0.07

FV= $2,032,644,647

Now, the present value:

PV= FV / (1+i)^n

PV= 2,032,644,647 / (1.07^50)

PV= $69,003,731.47