Overview
The Tollhouse Company is currently assessing several options in regards to the use of a piece of land recently acquired. The three options facing Tollhouse include the following:
1. Build a bakery facility on the land immediately, operating the bakery through its 25 year expected life cycle, with a facility renovation after 15 years of operations.
2. Build a bakery facility on the land immediately, operating the bakery for the first 15 years, and then renting the land out for the last 10 years.
3. Forgo the opportunity of building and operating the bakery in favor of renting out the land for all 25 years, using the $85 million capital investment required in Options 1 and 2 in another way.
While Tollhouse has three options to choose from, their main focus is the NPV of building the factory. If they build the factory, they can always conduct an analysis to either renovate the factory, or rent out the space after the original 15 year period is up.
Net Present Value Analysis
The Net present Value (NPV) Analysis was performed in both real and nominal terms. The NPV for the project is $271 million dollars. The results of the NPV analysis can be reviewed in Exhibits 1-2.
Assumptions
Assumptions that were made during this analysis include:
1. Depreciation added back into cash flows
2. Treated factory as an annuity through year 15
3. $2M Salvage value in year 15 added into the $20M CAPX also required that year (net of $18M)
Recommendations
It is recommended that the Tollhouse Company management undertake the project because of its positive Net Present Value, thus creating the greatest enhancement to S ...