Question

Vera Bradley’s cost of capital is 12.1% and their tax rate is 22.4%
The following information is available for the proposed investment project:
		Disappointing	Expected	Better Than Expected
	Initial Costs:
	Display and other Furniture & Fixtures		250,000
	Building Expansion		300,000
	Design R&D		200,000
	Other Initial Costs		55,000
	Commitment Period		5
	Depreciation Life - Building		25
	Terminal Value	775,000	910,000	1,150,000
	Necklace Revenue		625,000
	Bracelets Revenue		350,000
	Earrings Revenue		200,000
	Initial Sales		1,175,000
	Necklace Revenue Growth Rate	0.086	0.150	0.184
	Bracelets Revenue Growth Rate	0.042	0.070	0.122
	Earrings Revenue Growth Rate	0.011	0.020	0.068
	Variable Costs:
	Jewelry Merchandise		0.144
	Wages		0.097
	Other Variable Operating Costs		0.016
	Fixed Costs:
	Salaries		875,000
	Advertising/Promotion		50,000
1. Set-up an Excel spreadsheet that will calculate the NACFs, NPV and IRR for each of the scenarios above.

Answer 1

Since unit sales growth is not given, we will assume it to be constant

Buidling will be depreciated for 25 years, while other cost for 5 years. R&D expense will be amortised for 5 years