You are the CFO of Ivanhoe, Inc., a retailer of the exercise machine Ivanhoe6 and related accessories. Your firm is considering oper a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,500 exercise machines, and the p of each machine is $2,750. The annual sales of accessories will be $756,000, and the operating expenses of running the store, inclu labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $34,900,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2,000,000 in additional working capital immediately and recover it at the end of the investment. Your firm's marginal tax rate is 3 percent. The opportunity cost of opening up the store is 12.20 percent. What are the incremental free cash flows from this project at the beginning of the project as well as in years 1-19 and 20? (Do not round intermediate calculations. Round NPV answer to 2 decimal places, eg. 5,275.25 and all other answers to O decimal places, eg. 5,275 Incremental cash flow at the beginning of the project $ Incremental cash flow in the years 1-19

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
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You are the CFO of Ivanhoe, Inc., a retailer of the exercise machine Ivanhoe6 and related accessories. Your firm is considering opening
a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,500 exercise machines, and the price
of each machine is $2,750. The annual sales of accessories will be $756,000, and the operating expenses of running the store, including
labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal
$34,900,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest
$2,000,000 in additional working capital immediately and recover it at the end of the investment. Your firm's marginal tax rate is 30
percent. The opportunity cost of opening up the store is 12.20 percent.
What are the incremental free cash flows from this project at the beginning of the project as well as in years 1-19 and 20? (Do not
round intermediate calculations. Round NPV answer to 2 decimal places, e.g. 5,275.25 and all other answers to O decimal places, e.g. 5,275.)
Incremental cash flow at the beginning of the project
$
Incremental cash flow in the years 1-19
Incremental cash flow in the year 20
NPV of the project
Should you approve it?
You
the project.
$
+A
Transcribed Image Text:Current Attempt in Progress You are the CFO of Ivanhoe, Inc., a retailer of the exercise machine Ivanhoe6 and related accessories. Your firm is considering opening a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,500 exercise machines, and the price of each machine is $2,750. The annual sales of accessories will be $756,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $34,900,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2,000,000 in additional working capital immediately and recover it at the end of the investment. Your firm's marginal tax rate is 30 percent. The opportunity cost of opening up the store is 12.20 percent. What are the incremental free cash flows from this project at the beginning of the project as well as in years 1-19 and 20? (Do not round intermediate calculations. Round NPV answer to 2 decimal places, e.g. 5,275.25 and all other answers to O decimal places, e.g. 5,275.) Incremental cash flow at the beginning of the project $ Incremental cash flow in the years 1-19 Incremental cash flow in the year 20 NPV of the project Should you approve it? You the project. $ +A
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