a. A cookie company wants to expand its retail operations. Based on a preliminar

Question

a. A cookie company wants to expand its retail operations. Based on a preliminary study, 10 stores are feasible in various parts of the country. The cash flow at each store is expected to be $150000 in the first year and grow by 12.00% per year over the next 4 years (in years 2, 3, 4 and 5). At that point the project ends. Each store requires an immediate investment of $400000 to set up operations. Assuming a required rate of return 8.00%, what is the NPV of each store?

b. A small accounting firm is considering the purchase of a computer software package that would greatly reduce the amount of time needed to prepare tax forms. The software costs $2050 and this expense will be incurred immediately. The firm estimates that it will save $675 at the end of each year beginning in one year for 4 consecutive years, and also save $1856 in year 5. What is the payback on the computer package?

c. A marketing research firm with annual cash inflows of $650 does not expect any growth in annual cash inflows over the next two years. The company, however, anticipates that annual cash outflows, currently at $170 will increase to $250 in year 1 and to $300 in year 2. Assuming the tax rate of 36%, determine the firm's cash flow in YEAR TWO. Assume straight line depreciation of $50 per year.

Explanation / Answer

a.

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Cashflow in year 1 = 150000

Cashflow in year 2 = 150000*1.12 = 168000

Cashflow in year 3 = 168000*1.12 = 188160

Cashflow in year 4 = 188160*1.12 = 210739.20

Cashflow in year 5 = 210739.20*1.12 = 236027.90

Rate 8.00% Month(n) Cashflow (A) Discount rate = 1/(1+r)^(n) Present Value = A*discount rate 0 -400000.00 1.00 -400000.00 1 150000.00 0.93 138888.89 2 168000.00 0.86 144032.92 3 188160.00 0.79 149367.47 4 210739.20 0.74 154899.60 5 236027.90 0.68 160636.63 NPV 347825.51

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