Question

In: Accounting

A video rental store will cost $640,000 to open. Assuming annual sales of $1 million, variable...

A video rental store will cost $640,000 to open. Assuming annual sales of $1 million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35%, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12% cost of capital. Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by plus/minus 10% from their original estimates. Which variable appears to affect profitability the most?
Detailed problem solving steps are required

Solutions

Expert Solution

Sales 1,000,000
Less: Variable cost 350,000
Less: Fixed cost 300,000
less: Depreciation 100,000
Profit before tax 250,000
Less: Tax @35% 87,500
Profit after tax 162,500
Add: Depreciation 100,000
Cash flows p.a. 262,500

Calculation of NPV

Year Amount PVF@12% Discounted value
Initial investment 0 640,000 1 (640,000)
Cash flows p.a. 1-10 262,500 5.650 1,483,125
NPV 843,125

Case 1: Investment varies by 10%

Year Amount PVF@12% Discounted value
Initial investment 0 704,000 1 (704,000)
Cash flows p.a. 1-10 262,500 5.650 1,483,125
NPV 779,125

Sensitivity = (779,125 - 843,125)/ 843,125

= -7.59% if Investment increases by 10%

and +7.59% if investment decreases by 10%

Case 2: If sales varies

Sales 1,100,000
Less: Variable cost 350,000
Less: Fixed cost 300,000
less: Depreciation 100,000
Profit before tax 350,000
Less: Tax @35% 122,500
Profit after tax 227,500
Add: Depreciation 100,000
Cash flows p.a. 327,500

Calculation of NPV

Year Amount PVF@12% Discounted value
Initial investment 0 640,000 1 (640,000)
Cash flows p.a. 1-10 327,500 5.650 1,850,375
NPV 1,210,375

Sensitivity = (1,210,375 - 843,125)/ 843,125

= 43.56% if sales increases by 10%, and -43.56% if sales decreases by 10%

Case 3: If Variable cost varies

Sales 1,000,000
Less: Variable cost 385,000
Less: Fixed cost 300,000
less: Depreciation 100,000
Profit before tax 215,000
Less: Tax @35% 75,250
Profit after tax 139,750
Add: Depreciation 100,000
Cash flows p.a. 239,750

Calculation of NPV

Year Amount PVF@12% Discounted value
Initial investment 0 640,000 1 (640,000)
Cash flows p.a. 1-10 239,750 5.650 1,354,588
NPV 714,588

Sensitivity = (714,588 - 843,125)/ 843,125

= -15.25% if variable cost increases by 10%, and 15.25% if variable cost decreases by 10%

Case 4: If fixed cost varies

Sales 1,000,000
Less: Variable cost 350,000
Less: Fixed cost 330,000
less: Depreciation 100,000
Profit before tax 220,000
Less: Tax @35% 77,000
Profit after tax 143,000
Add: Depreciation 100,000
Cash flows p.a. 243,000

Calculation of NPV

Year Amount PVF@12% Discounted value
Initial investment 0 640,000 1 (640,000)
Cash flows p.a. 1-10 243,000 5.650 1,372,950
NPV 732,950

Sensitivity = (732,950 - 843,125)/ 843,125

= -13.07% ifi fixed cost increases by 10%, and 13.07% if fixed cost decreases by 10%

Change in the value of Sales has affected the NPV the most

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

An equipment hire shop will cost $1,200,000 to open. Assuming annual sales of $1 million, variable...
An equipment hire shop will cost $1,200,000 to open. Assuming annual sales of $1 million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 28%, calculate the NPV of the project over a 10-year horizon with a 12% cost of capital (assume there is no inflation or salvage value). Conduct a sensitivity analysis by allowing first sales, then variable costs, and finally fixed costs to vary by ±10% from their original estimates. Show...
A store will cost $875,000 to open. Variable costs will be 51% of sales and fixed...
A store will cost $875,000 to open. Variable costs will be 51% of sales and fixed costs are $210,000 per year. The investment costs will be depreciated straight-line over the 9 year life of the store to a salvage value of zero. The opportunity cost of capital is 8% and the tax rate is 40%. sales revenue is $700,000 per year. Using an operating cash flow of 118,688.89, calculate the Net Present Value. = -133574.24 Find the net present value...
1. The Polyana Shoe Store had sales last year of $40 million based upon a cost...
1. The Polyana Shoe Store had sales last year of $40 million based upon a cost of goods sold of $30 million. Purchases represent 75% of COGS. Polyana also has inventory, accounts receivable and accounts payable of $5,000,000, $7,000,000, and $3,500,000, respectively. (Round-up the days to next whole number) a) What is Polyana’s cash conversion cycle period? b) Based on current sales and cash conversion cycle, what is Polyana’s working capital requirement? c) If sales remain at $40 million and...
A firm with annual sales of $60 million pays out 50% of its sales as cost...
A firm with annual sales of $60 million pays out 50% of its sales as cost of goods sold. Overhead amounts to $10 million. Labour and salaries are $14 million. Thus, a profit of $6 million is realised. Assets are $20 million, of which 20% are in inventories. a) If the firm can (1) increase sales volume, (2) raise price, (3) reduce labour and salaries, (4) decrease overhead, or (5) reduce the costs of goods sold, how much change (in...
Dabble, Inc., has sales of $980,000 and cost of goods sold of $640,000. The firm had...
Dabble, Inc., has sales of $980,000 and cost of goods sold of $640,000. The firm had a beginning inventory of $36,000 and an ending inventory of $46,000. What is the length of the days’ sales in inventory? (Use 365 days a year. Round your answer to 2 decimal places. Use ending inventory rather than average inventory.) Days' sales in inventory days   
1. Assuming that direct labor is a variable cost, product costs under variable costing include only:...
1. Assuming that direct labor is a variable cost, product costs under variable costing include only: Select one: a. direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative expenses. b. direct materials and direct labor. 3. Which of the following statements is true? I. Expenses are not usually separated into variable and fixed elements in externally reported income statements. II.   Even if there is no change in units sold, selling price, or cost structure, a company can...
Carey's Department Store had net sales of​ $20 million and cost of goods sold of $14.00...
Carey's Department Store had net sales of​ $20 million and cost of goods sold of $14.00 million for the year. The beginning inventory for the year was $7.00 million. The ending inventory for the year was $11.00 million. What was the​ days' inventory​ outstanding? (Round any intermediary calculations to two decimal places and your final answer to the nearest​ day.)
The following data from the Oasis Corporation is below: Sales $              640,000 Direct Labor Cost 90,000...
The following data from the Oasis Corporation is below: Sales $              640,000 Direct Labor Cost 90,000 Raw Material Purchases 132,000 Manufacturing Overhead applied to WIP 210,000 Actual Manufacturing Overhead costs 220,000 Administrative Salaries 38,000 Depreciation Expense - Office 15,000 Marketing Expense 22,000 Rent Expense - Office 34,000 Sales Salaries 35,000 Sales Commissions 12,000 Direct Materials, beginning balance 8,000 Direct Materials, ending balance 10,000 Work in Process, beginning balance 5,000 Work in Process, ending balance 20,000 Finished Goods, beginning balance 70,000...
Westerville Company reported the following results from last year’s operations:   Sales $ 2,000,000       Variable expenses 640,000...
Westerville Company reported the following results from last year’s operations:   Sales $ 2,000,000       Variable expenses 640,000       Contribution margin 1,360,000       Fixed expenses 860,000       Net operating income $ 500,000       Average operating assets $ 1,250,000     This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics:   Sales $ 400,000   Contribution margin ratio 70 % of sales   Fixed expenses $ 220,000 The company’s minimum required rate of return is 10%. 6. What is the ROI...
Dickson City Company has annual sales of $5 million, while the cost of goods sold is...
Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2 million. All sales are made on a cash basis. The owner of Dickson has come up with the plan of giving credit to the customers. He believes that this will increase the sales by 25% without increasing any of the fixed costs. He thinks that 20% of the customers will pay within 30 days, 40% within 60 days, 37% within 90 days, and...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT