Question

You are the CFO of Carla Vista, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,400 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $33,500,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2,500,000 in additional working capital immediately, and recover it at the end of the investment. Your firm’s marginal tax rate is 30 percent. The opportunity cost of opening up the store is 17.40 percent. What are the incremental free cash flows from this project at the beginning of the project as well as in years 1–19 and 20? (Do not round intermediate calculations. Round NPV answer to 2 decimal places, e.g. 5,265.25 and all other answers to the nearest dollar, e.g. 5,265.)

Incremental cash flow at the beginning of the project		$
Incremental cash flow in the years 1-19		$
Incremental cash flow in the year 20		$
NPV of the project		$

Should you approve it?

Answer 1

SOLUTION:-

N 248 0244 - X v fx -K243/20 A B C D E F G H I J K L M Depreciatio After-tax | Working PVIF@ 242 Year Revenue Costs Depreciation | PBT Tax@30% Net income OCE capital Investment Net cash flow 17.4% 243 0 $ (2,500,000) $ (33,500,000) $ (36,000,000)| 1.000 $ 244 1 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.852 $ 245 2 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.726 $ 246 3 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.618 $ 247 4 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.526 $ 5 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $1,675,000 $4,562,500 $ 4,562,500 0.448 $ 249 6 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.382 $ 250 zl $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.325 $ 251 8 $ 11,600,000 $5,800,000 $ 1,675,000 $ 4,125,000 $1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.277 $ 252 9 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.236 $ 253 10 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.201 $ 11 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.171 $ 255 12 $ 11,600,000 $5,800,000 $ 1,675,000 $ 4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.146 $ 256 13 $ 11,600,000 $5,800,000 $ 1,675,000 $ 4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.124 $ 257 14 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.106 $ 258 15 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.090 $ 259 16 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.077 $ 260 17 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.065 $ 261 18 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.056 $ 262 19 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 4,562,500 0.047 $ 263 20 $ 11,600,000 $5,800,000 $ 1,675,000 $4,125,000 $ 1,237,500 $ 2,887,500 $ 1,675,000 $4,562,500 $ 2,500,000 $ 7,062,500 0.040 $ 264 Present value (36,000,000.00) 3,886,286.20 3,310,294.89 2,819,671.97 2,401,764.88 2,045,796.32 1,742,586.30 1,484,315.42 1,264,323.19 1,076,936.27 917,322.21 781,364.74 665,557.70 566,914.57 482,891.46 411,321.51 350,359.04 298,431.89 254,200.93 216,525.49 285,493.70 254 Net present value -$10,737,641.32 $ 265 271 Incremental cash flow at the beginning of the project at the beginning of the proiect 272 Incremental cash flow in the years 1-19 273 Incremental cash flow in the year 20 274 NPV of the project (36,000,000) 4,562,500 7,062,500 $10,737,641.32 $

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