Benford, Inc., is planning to open a new sporting goods store in a suburban mall. Benford will
Question:
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.
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.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow