Question

Fast Fitness Limited is a major retailer of fitness machines and accessories. It is currently considering investing in a new store in Brisbane. The Brisbane store will have a lifespan of 20 years and the new investment will require an initial investment of $30 million. It will be fully depreciated on a straight-line basis over the life of the store. The store is expected to generate annual sales of 5,000 fitness machines, and the price of each machine is $2,300. Sales of accessories will be another $500,000 per year. Operating expenses of running the store, including labour and rent, will amount to 60 per cent of the revenues from the fitness machines. The business will need to invest $2 million in additional working capital immediately, and recover it at the end of the investment.

The company tax rate is 30%, and the opportunity cost of opening up the store is 10%. What are the incremental cash flows from this project at the beginning of the project as well as in years 1-19 and 20? Should the project be approved? Tabulate your answers clearly

(SHOW WORKINGS PLEASE)

Answer 1