Erma's Beauty Supply, Inc. is considering expanding the company's existing store. Erma's wants to lease the office space next door. Erma's must spend $110,000 on new equipment to expand. The equipment is expected to have a zero-salvage value and an 8-year useful life. Erma's believes that the equipment will be worthless at the end of its 8-year life. Erma's believes it will have to increase net working capital by $12,000; this amount will be recovered at the end of 8 years. Last month, Erma's spent $12,000 to conduct a survey of potential new customers in the area surrounding the current store to see if there was sufficient demand for a larger store. Erma's estimates that net revenue will increase by $100,000 per year in the new store for eight years. The direct expenses incurred to make those sales are $65,000, including rent. The lease Erma's is considering signing is for 8 years. Erma's Beauty Supply has a marginal tax rate of 40% and has a weighted average cost of capital of 10.0%. 36. How much does Erma need to expand her business at T=0? 37. Based on this information, the project's operating cash flow in each of the first seven years is $_______________? 38. Based on this information, the project's terminal year (year 8) total cash flow is $______________?
Erma's Beauty Supply, Inc. is considering expanding the company's existing store. Erma's wants to lease the office space next door. Erma's must spend $110,000 on new equipment to expand. The equipment is expected to have a zero-salvage value and an 8-year useful life. Erma's believes that the equipment will be worthless at the end of its 8-year life. Erma's believes it will have to increase net working capital by $12,000; this amount will be recovered at the end of 8 years. Last month, Erma's spent $12,000 to conduct a survey of potential new customers in the area surrounding the current store to see if there was sufficient demand for a larger store. Erma's estimates that net revenue will increase by $100,000 per year in the new store for eight years. The direct expenses incurred to make those sales are $65,000, including rent. The lease Erma's is considering signing is for 8 years. Erma's Beauty Supply has a marginal tax rate of 40% and has a weighted average cost of capital of 10.0%. 36. How much does Erma need to expand her business at T=0? 37. Based on this information, the project's operating cash flow in each of the first seven years is $_______________? 38. Based on this information, the project's terminal year (year 8) total cash flow is $______________?
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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Transcribed Image Text:Erma's Beauty Supply, Inc. is considering expanding the company's existing store. Erma's wants to lease
the office space next door. Erma's must spend $110,000 on new equipment to expand. The equipment is
expected to have a zero-salvage value and an 8-year useful life. Erma's believes that the equipment will be
worthless at the end of its 8-year life. Erma's believes it will have to increase net working capital by
$12,000; this amount will be recovered at the end of 8 years. Last month, Erma's spent $12,000 to conduct
a survey of potential new customers in the area surrounding the current store to see if there was sufficient
demand for a larger store. Erma's estimates that net revenue will increase by $100,000 per year in the new
store for eight years. The direct expenses incurred to make those sales are $65,000, including rent. The
lease Erma's is considering signing is for 8 years. Erma's Beauty Supply has a marginal tax rate of 40%
and has a weighted average cost of capital of 10.0%.
36. How much does Erma need to expand her business at T=0?
37. Based on this information, the project's operating cash flow in each of the first seven years is
S__?
38. Based on this information, the project's terminal year (year 8) total cash flow is $_
?
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