You are the CFO of Oriole, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a lifeof 20 years. It will generate annual sales of 4,000 exercise machines, and the price of each machine is \$2,500. The annual sales of accessories will be \$600,000, and the operating expenses ofrunning the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal \$30,900,000 and will be fullydepreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest \$1,000,000 in additional working capital immediately, and recover it at the end of theinvestment. Your firm's marginal tax rate is 30 percent. The opportunity cost of opening up the store is 10.80 percent. What are the incremental free cash flows from this project at thebeginning of the project as well as in years 1-19 and 20? (Do not round intermediate calculations. Round NPV answer to 2 decimal places, e.g. 5,265.25 and all other answers to thenearest dollar, e.g. 5,265.)Incremental cash flow at the beginning of the project\$\$Incremental cash flow in the years 1-19\$Incremental cash flow in the year 20\$NPV of the projectShould you approve it?the project.YoutATATA

Question
Asked Oct 21, 2019
10 views
check_circle

Expert Answer

Step 1

Incremental cash flow at the beginning of the project = -( initial investment in the store + initial investment in working capital) = - (30,900,000 + 1,000,000) = - 31,900,000

Step 2

Incremental cash flow in the year 1 to 19: \$ 4,173,500

Please see the white board. Please be guided by the second column titled “Linkage” to understand the mathematics. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in \$.

Step 3

Incremental cash flows in year 20 = Annual incremental cash flow of year 1 to 19 + r...

Want to see the full answer?

See Solution

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in