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Set up the cash flows for this project. Determine the discount rate for this project. Calculate the NPV for the project.

Set up the cash flows for this project. Determine the discount rate for this project. Calculate the NPV for the project.

Essentials Of Investments
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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TLC Yogurt has decided to capitalize on the exercise fad and plans to open an exercise facility in conjunction with its main yogurt and health food stores. To get the project under way, the company will rent additional space adjacent to its current store. $60,000. Shipping and installation will total $5,000. This equipment will be depreciated on a straight line basis over 5 years with no salvage value. TLC estimates that it will have to add about $7,000 in net working The equipment required for the facility will cost capital before the project even begins. During the first year of operations, expects its total revenues to increase by $50,000 above the level that would have prevailed without the exercise facility. These incremental revenues are expected to grow to $65,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $40,000 during the fifth and final year of the project's life. The company's incremental operating costs, including the rental of the exercise facility, are expected to total $30,000 the first year and increase at a rate of 6% per year over the 5-year life of the project. TLC has a marginal tax rate of 40%. In addition, TLC expects to have to add $5,000 per year to its net working capital in years 1, 2 and 3, and nothing in years 4 and 5. At the end of the project, the total accumulated net working capital required by the project will be recovered. TLC has a cost of debt of 12%. It is closely held, but believes a reasonable required return for its equity to be 18%. It has a target capital structure of 50% debt and 50% equity. Set up the cash flows for this project. Determine the discount rate for this project. Calculate the NPV for the project. I'niversity of Mar!
Transcribed Image Text:TLC Yogurt has decided to capitalize on the exercise fad and plans to open an exercise facility in conjunction with its main yogurt and health food stores. To get the project under way, the company will rent additional space adjacent to its current store. $60,000. Shipping and installation will total $5,000. This equipment will be depreciated on a straight line basis over 5 years with no salvage value. TLC estimates that it will have to add about $7,000 in net working The equipment required for the facility will cost capital before the project even begins. During the first year of operations, expects its total revenues to increase by $50,000 above the level that would have prevailed without the exercise facility. These incremental revenues are expected to grow to $65,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $40,000 during the fifth and final year of the project's life. The company's incremental operating costs, including the rental of the exercise facility, are expected to total $30,000 the first year and increase at a rate of 6% per year over the 5-year life of the project. TLC has a marginal tax rate of 40%. In addition, TLC expects to have to add $5,000 per year to its net working capital in years 1, 2 and 3, and nothing in years 4 and 5. At the end of the project, the total accumulated net working capital required by the project will be recovered. TLC has a cost of debt of 12%. It is closely held, but believes a reasonable required return for its equity to be 18%. It has a target capital structure of 50% debt and 50% equity. Set up the cash flows for this project. Determine the discount rate for this project. Calculate the NPV for the project. I'niversity of Mar!
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