Question

A store will cost $875,000 to open. Variable costs will be 51% of sales and fixed costs are $210,000 per year. The investment costs will be depreciated straight-line over the 9 year life of the store to a salvage value of zero. The opportunity cost of capital is 8% and the tax rate is 40%.

Find the operating cash flow each year if sales revenue is $700,000 per year.

Using an operating cash flow of 118,688.89, calculate the Net Present Value. Should the store be opened?

Enter your response for net present value below.

Answer 1

Year Cash flow | PVIF@8% 0 $ (875,000) 1.000 $ 1 $ 118,688.89 0.926 $ 2 $ 118,688.89 0.857 $ 3 $ 118,688.89 0.794 $ 4 $ 118,688.89 0.735 $ 5 $ 118,688.89 0.681 $ 6 $ 118,688.89 0.630 $ 7 $ 118,688.89 0.584 $ 8 $ 118,688.89 0.540 $ 9 $ 118,688.89 0.500 $ Present value -875,000.00 109,894.04 101,751.99 94,215.24 87,236.33 80,779.66 74,797.74 69,254.97 64,127.61 59,368.18 Net present value ,574.24

The store should not be opened as the NPV < 0

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