FARAH is planning to open a new sporting goods store in a suburban mall. FARAH 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 five-year period on a straight line basis. The new store will require FARAH 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 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. FARAH's marginal tax rate is 40 percent.
Calculate the store's net present value using a 12 percent weighted average cost of capital.
Should FARAH accept the project?
Calculate the store's internal rate of return.
Calculate the project's payback.