Question

You are the CFO of Crane, 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 4,900 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 $25,100,000 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 11.60 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.)

Answer 1

Statement showing NPV

Particulars	0	1 to 19 years	20th year	NPV = sum of PV
Initial investment in the store	-25100000
Additional working capital	-2500000
Annual sales from exercise equipment (4900x2500)		12250000	12250000
Annual sales of accessories		600000	600000
Less:
Operating expenses of running the store (50% of 12250000)		6125000	6125000
Depreciation		1255000	1255000
PBT		5470000	5470000
Tax @ 30%		1641000	1641000
PAT		3829000	3829000
Add: Depreciation		1255000	1255000
Anunal cash flow		5084000	5084000
Relaease of WC			2500000
Total cash flow	-27600000	5084000	7584000
PVIFA(11.6%,20 years)		7.5494
PVIF(11.6%, 20th year)			0.1114
PV of cash flow	-27600000.00	38380956.44	844528.74	11625485.18

Thus NPV = 11,625,485.18 $