The ice cream shop described in the text has been a smash success. Customers from the next college town are pleading with you to open one closer to them. Based on your operating experience and knowledge of local real estate, you believe that opening a new ice cream shop will require an investment of $20,000 in fixed assets and $3,000 in working capital. Fixed assets will be straight-line depreciated over five years. Preliminary market research indicates that sales revenue in the first year should be about $50,000 and that variable costs, excluding depreciation, will be about 80% of sales. To be on the safe side, you assume sales revenue will not change over the next five years. At the end of five years, you estimate you can sell your business, after-tax, for $25,000. Using a 28% tax rate and a 12% required return, should you expand?
Answer to relevant QuestionsSensitivity analysis involves changing one variable at a time in a capital budgeting situation and seeing how NPV changes. Perform sensitivity analysis on the each of the following variables from problem 17 to determine its ...How have the Fed’s policies since the 2007-2009 recession affected corporate financing decisions? A booming economy creates an unexpectedly high sales growth rate for a firm with a low internal growth rate. How can the firm respond to this unplanned sales increase? AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10 percent. a. What is AQ&Q’s indifference level of EBIT? b. Given its current situation, might ...Derive equation 18-8 for the internal growth rate. Let S = last year's sales revenue; A = last year's total assets; D = last year's total liabilities; E = last year's stockholder's equity; NI/S =the firm's (presumably ...
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