Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford...

Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated to $0 over a 5-year period on a straight-line basis. The new store will require Benford to increase its net working capital by $200,000 at time 0.

First-year sales are expected to be $1 million and to increase at an annual rate of 8 percent over the expected 10-year life of the store. Operating expenses (including lease payments but excluding depreciation) are projected to be $700,000 during the first year and to increase at a 7 percent annual rate. The salvage value of the store’s equipment and fixtures is anticipated to be $10,000 at the end of 10 years.

Benford’s marginal tax rate is 40 percent. (Note: This problem is the same as problem 12 in Chapter 9, except for the following questions.)

a. Calculate the store’s net present value, using an 18 percent required return.

b. Should Benford accept the project?

c. Calculate the store’s internal rate of return.

d. Calculate the store’s profitability index.

Reference: Problem 12:

Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated over a 5-year period on a straight-line basis to $0. The new store will require Benford to increase its net working capital by $200,000 at time 0. First-year sales are expected to be $1 million and to increase at an annual rate of 8 percent over the expected 10-year life of the store. Operating expenses (including lease payments and excluding depreciation) are projected to be $700,000 during the first year and increase at a 7 percent annual rate. The salvage value of the store’s equipment and fixtures is anticipated to be $10,000 at the end of 10 years. Benford’s marginal tax rate is 40 percent.

a. Compute the net investment required for Benford.

b. Compute the annual net cash flows for the 10-year projected life of the store.

c. Compute the annual net cash flows assuming equipment and fixtures are depreciated using the 7-year asset class under MACRS (Appendix 9A).