ABC Inc. is considering whether to add a new store in Denver. The project will require the company to buy some new equipment at a cost of $$240,000,$ and will also require $$3,350$ in shipping, handling, and installation costs. To operate the equipment properly, workers will have to go through a brief training session that will cost $$1,800.$ To finance the purchase of the equipment, ABC Inc. will take out a $5-$year, $$200,000$ bank loan at an annual interest rate of $10\%.$ To support the operations, ABC Inc. will need to increase initially working capital by $$22,500.$ The project is expected to last $5$ years. The new store in Denver is expected to generate annual sales of $$790,000$ over the next $5$ years. The annual operating costs associated with the store will be $$634,000.$ A return of the initial working capital will occur at the end of the $5$th year. The new equipment has an expected life of $5$ years, and will be depreciated using a straight line method to a book value of $$0.$ It is anticipated that the machine will be sold for $$3,700$ at the termination of the project. ABC Inc.$$s marginal tax rate is $30\%.$ Calculate the project$$s net initial investment in year $0,$ annual incremental operating cash flows during year $1$ and year $4$ of the project, and the total cash flows in the terminal year $($i$.$e$.,$ year $5)$ of the project. Assuming that ABC Inc.$\text{'}$s cost of capital is $12\%,$ calculate the NPV$,$ PI$,$ IRR and payback period of the project. Should the project be adopted?

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To solve this capital budgeting problem we need to calculate various financial metrics such as net i... View the full answer