Question

The SAI Inc. is planning to set up a new store. The startup cost of the store is $650,000. The store will increase revenue by $270,000 each year for the next six years and all costs including costs of merchandise, labor, utilities, and taxes are $130,000 per year. The store will require upgrade to the store front every two years at a cost of $35,000 each time. At the end of the six years, the store inventory will be sold off at a super sale to receive $10,000 after taxes and the company will cease operations. The company’s cost of capital is 4.5 percent. The level of risk of the product sales is the same as the overall risk for the company.

What is the NPV of the new store decision?

	A.	-$8,495
	B.	$10,702
	C.	$17,572
	D.	-$ 5,428
	E.	$16,598
	F.	$18,381

Answer 1

Calculation of NPV
								4.50%
Year		Capital	Revenue	Cost	Upgrade cost	Store sell	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$     (650,000)					$     (650,000)	1.0000	$(650,000)
1			$      270,000	$     (130,000)			$       140,000	0.9569	$ 133,971
2			$      270,000	$     (130,000)	$       (35,000)		$       105,000	0.9157	$    96,152
3			$      270,000	$     (130,000)			$       140,000	0.8763	$ 122,682
4			$      270,000	$     (130,000)	$       (35,000)		$       105,000	0.8386	$    88,049
5			$      270,000	$     (130,000)			$       140,000	0.8025	$ 112,343
6			$      270,000	$     (130,000)		$        10,000	$       150,000	0.7679	$ 115,184
							Net Present Value	$    18,381
	So option E is correct solution