Assume a company is considering investing in opening a new store. The following assumptions are made: *Furniture, fixtures, and leasehold improvements will cost $450,000. Company will spend $30,000 to purchase inventory for the grand opening. Company already spent $12,000 in consulting fees. *Company expects to sell 5,000 units each year for the next six years at an average $75 sales price per unit and an average $45 variable cost per unit. Company will incur $70,000 in fixed operating costs each year. *Furniture, fixtures, and leasehold improvements will depreciate on an accelerated basis for tax purposes using a 7-year MACRS asset life. Company expects to switch to a different location six years from now and sell the furniture and fixtures for $65,000 before tax and sell through the remaining inventory. *Company's tax rate will be 32%. What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar Le. 123456. Do not include commas or a dollar sign with your answer.) (Hint: You will need OCF, net working capital, and capital spending cash flows.)
Assume a company is considering investing in opening a new store. The following assumptions are made: *Furniture, fixtures, and leasehold improvements will cost $450,000. Company will spend $30,000 to purchase inventory for the grand opening. Company already spent $12,000 in consulting fees. *Company expects to sell 5,000 units each year for the next six years at an average $75 sales price per unit and an average $45 variable cost per unit. Company will incur $70,000 in fixed operating costs each year. *Furniture, fixtures, and leasehold improvements will depreciate on an accelerated basis for tax purposes using a 7-year MACRS asset life. Company expects to switch to a different location six years from now and sell the furniture and fixtures for $65,000 before tax and sell through the remaining inventory. *Company's tax rate will be 32%. What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar Le. 123456. Do not include commas or a dollar sign with your answer.) (Hint: You will need OCF, net working capital, and capital spending cash flows.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Vijay shiyal
Transcribed Image Text:Assume a company is considering investing in opening a new store. The following assumptions are made:
*Furniture, fixtures, and leasehold improvements will cost $450,000. Company will spend $30,000 to purchase inventory for the grand opening.
Company already spent $12,000 in consulting fees.
*Company expects to sell 5,000 units each year for the next six years at an average $75 sales price per unit and an average $45 variable cost per unit.
Company will incur $70,000 in fixed operating costs each year.
*Furniture, fixtures, and leasehold improvements will depreciate on an accelerated basis for tax purposes using a 7-year MACRS asset life.
*Company expects to switch to a different location six years from now and sell the furniture and fixtures for $65,000 before tax and sell through the
remaining inventory.
*Company's tax rate will be 32%.
What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes?
(Do not round intermediate calculations. Round your final answer to the nearest whole dollar Le. 123456. Do not include commas or a dollar sign with
your answer.)
(Hint: You will need OCF, net working capital, and capital spending cash flows.)
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