TLC Yogurt has decided to capitalize on the exercise fad and plans to open an exercise facility inconjunction with its main yogurt and health food stores. To get the project under way, the company willrent additional space adjacent to its current store.$60,000. Shipping and installation will total $5,000. This equipment will be depreciated on a straight linebasis over 5 years with no salvage value. TLC estimates that it will have to add about $7,000 in net workingThe equipment required for the facility will costcapital before the project even begins.During the first year of operations, expects its total revenues to increase by $50,000 above the level thatwould have prevailed without the exercise facility. These incremental revenues are expected to grow to$65,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $40,000 during thefifth and final year of the project's life. The company's incremental operating costs, including the rentalof the exercise facility, are expected to total $30,000 the first year and increase at a rate of 6% per yearover the 5-year life of the project. TLC has a marginal tax rate of 40%. In addition, TLC expects to have toadd $5,000 per year to its net working capital in years 1, 2 and 3, and nothing in years 4 and 5. At the endof the project, the total accumulated net working capital required by the project will be recovered.TLC has a cost of debt of 12%. It is closely held, but believes a reasonable required return for its equity tobe 18%. It has a target capital structure of 50% debt and 50% equity.Set up the cash flows for this project.Determine the discount rate for this project.Calculate the NPV for the project.I'niversity of Mar!

Net Present Value: It is a measure of profitability in capital budgeting and shows the amount of…

Answered: Set up the cash flows for this project.…

Set up the cash flows for this project. Determine the discount rate for this project. Calculate the NPV for the project.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 16P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

100%

TLC Yogurt has decided to capitalize on the exercise fad and plans to open an exercise facility in
conjunction with its main yogurt and health food stores. To get the project under way, the company will
rent additional space adjacent to its current store.
$60,000. Shipping and installation will total $5,000. This equipment will be depreciated on a straight line
basis over 5 years with no salvage value. TLC estimates that it will have to add about $7,000 in net working
The equipment required for the facility will cost
capital before the project even begins.
During the first year of operations, expects its total revenues to increase by $50,000 above the level that
would have prevailed without the exercise facility. These incremental revenues are expected to grow to
$65,000 in year 2, $75,000 in year 3, decline to $60,000 in year 4, and decline again to $40,000 during the
fifth and final year of the project's life. The company's incremental operating costs, including the rental
of the exercise facility, are expected to total $30,000 the first year and increase at a rate of 6% per year
over the 5-year life of the project. TLC has a marginal tax rate of 40%. In addition, TLC expects to have to
add $5,000 per year to its net working capital in years 1, 2 and 3, and nothing in years 4 and 5. At the end
of the project, the total accumulated net working capital required by the project will be recovered.
TLC has a cost of debt of 12%. It is closely held, but believes a reasonable required return for its equity to
be 18%. It has a target capital structure of 50% debt and 50% equity.
Set up the cash flows for this project.
Determine the discount rate for this project.
Calculate the NPV for the project.
I'niversity of Mar!

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