Texts: urgent will upvote
You are the CFO of Sheridan Inc., a retailer of the exercise machine Sheridan6 and related accessories. Your firm is considering opening a new store in Los Angeles. The store will have a life of 15 years. It will generate annual sales of 6,000 exercise machines and the price of each machine is $1,950. The annual sales of accessories will be $570,000, and the operating expenses of running the store, including labor and rent, will amount to 40 percent of the revenues from the exercise machines. The initial investment in the store will equal $40,000,000 and will be fully depreciated on a straight-line basis over the 15-year life of the store. Your firm will need to invest $700,000 in additional working capital immediately and recover it at the end of the investment. Your firm's marginal tax rate is 28 percent. The opportunity cost of opening up the store is 13.5 percent.
Access Excel sheet here.
1. What are the incremental free cash flows from this project at the beginning of the project? -$40,000,000
2. What are the incremental free cash flows from this project in years 1-14? $6,211,467
3. What are the incremental free cash flows from this project at the terminal year? $6,211,467
4. What is the NPV of the project and should you invest in it? $4,730,170. No.