Reference no: EM132288709
Suppose you are considering opening a bicycle store in Dallas. After looking at many potential locations, you find one which you believe is ideal. You purchase a the location of a former CVS store. The purchase price of the building was $400,000. In addition, you need to invest another $200,000 to make the location suitable as a shoe store. Assume these capital investments have an average life of five years with a $100,000 salvage value.
You estimate your initial investment in working capital is $175,000. Assume going forward that net working capital is 25% of sales
You estimate first year sales of $1,000,000 and your expect sales to grow at an annual rate of 3%. Your cost of goods (COGS) is estimated at 50% of sales. Assume your annual rent, utilities, insurance and other related costs (SG&A) is $175,000 per year.
Assume an income tax rate of 30%
Assume a required rate of return of 16%. Derive the project's NPV or XNPV. Should the project be undertaken? Why or why not? What is the project's IRR or XIRR?
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