Question

They are interested in remodeling an existing vacant store at initial cost (t=0) of $95,000 and then paying $8,000 per year in rent and $38,000 in other annual expenses.  Cash inflows are expected at $78,000 per year over the next five years.  All Cash Flows except the $95,000 occur at the end of each year.  Given a required return of 8.6% per year, is this a good deal?

No, the Net Present Value (NPV) is negative.
Yes, the Net Present Value (NPV) is $27,771.
Yes, the Net Present Value (NPV) is $30,771.
No, the Discounted Payback Period is less than five years.

Answer 1

- Initial Cost of Store = $95,000

- Yearly Expenses = Rent + Other Expenes

=$8,000 + $38,000

=$46,000

- Annual Cash inflow from year 1 to 5 = Cash inflows - expenses

=$78,000 - $46,000

=$32,000

- Calculating the NPV of the Store:-

Year	Cash Flows of Project ($)	PV Factor @8.60%	Present Value of Project ($)
0	(95,000.00)	1.0000	(95,000.00)
1	32,000.00	0.9208	29,465.93
2	32,000.00	0.8479	27,132.53
3	32,000.00	0.7807	24,983.92
4	32,000.00	0.7189	23,005.45
5	32,000.00	0.6620	21,183.65
			30,771.48

So, NPV of Store is $30,771.48

Hence, Yes its a Good deal.

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