The TLC Yogurt Company has decided to capitalize on the exercise fad and plans to open an exercise facility in conjunction with its main yogurt and health foods store. To get the project under way, the company will rent additional space adjacent to its current store. The equipment required for the facility will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be depreciated on a straight-line basis over its five-year economic life to an estimated salvage value of $0. In order to open the exercise facility, TLC estimates that it will have to add about $7,000 initially to its net working capital in the form of additional inventories of exercise supplies, cash, and accounts receivable for its exercise customers. In addition, TLC expects that it will have to add about $5,000 per year to its net working capital in years 1, 2, and 3 and nothing in years 4 and 5. All net working capital that was spent on the project will be recovered in the final year. During the first year of operations, TLC expects its total revenues (from yogurt sales and exercise services) to increase by $50,000 above the level that would have prevailed without the exercise facility addition. These incremental revenues are expected to grow to $60,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $45,000 during the fifth year of the project’s life. The company’s incremental operating costs associated with the exercise facility, including the rental of the facility, are expected to total $25,000 during the first year and increase at a rate of 6 percent per year over the five-year project life. TLC has a marginal tax rate of 40 percent Calculate the Net Present Value (NPV) of this project if the company’s required rate of return is 12%. Would you, as the Finance Manager, recommend to the CEO to accept this project?
Question 1
The TLC Yogurt Company has decided to capitalize on the exercise fad and plans to open an exercise facility in conjunction with its main yogurt and health foods store. To get the project under way, the company will rent additional space adjacent to its current store.
The equipment required for the facility will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be
In order to open the exercise facility, TLC estimates that it will have to add about $7,000 initially to its net working capital in the form of additional inventories of exercise supplies, cash, and accounts receivable for its exercise customers. In addition, TLC expects that it will have to add about $5,000 per year to its net working capital in years 1, 2, and 3 and nothing in years 4 and 5. All net working capital that was spent on the project will be recovered in the final year.
During the first year of operations, TLC expects its total revenues (from yogurt sales and exercise services) to increase by $50,000 above the level that would have prevailed without the exercise facility addition. These incremental revenues are expected to grow to $60,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $45,000 during the fifth year of the project’s life.
The company’s incremental operating costs associated with the exercise facility, including the rental of the facility, are expected to total $25,000 during the first year and increase at a rate of 6 percent per year over the five-year project life. TLC has a marginal tax rate of 40 percent
- Calculate the
Net Present Value (NPV) of this project if the company’s requiredrate of return is 12%. - Would you, as the Finance Manager, recommend to the CEO to accept this project?
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