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2. Fryer's Hardware is a hardware store, selling both large equipment (lawnmowers, snow blowers etc.) and conventional hardware. The store generated $500,000 in after- tax
2. Fryer's Hardware is a hardware store, selling both large equipment (lawnmowers, snow blowers etc.) and conventional hardware. The store generated $500,000 in after- tax operating income from revenues of $ 5 million last year; large equipment accounted for 40% of the revenues and 60% of after-tax operating income. Fryer's is considering opening a equipment servicing center on site and has the following nformation: The initial investment in the service center is expected to be $1.00 million, depreciable straight line over five years to a salvage value of zero. The service center is expected to generate $400,000 in revenues each year for the next 5 years and the costs of personnel and material is expected to be $150,000 each year The marginal tax rate is 40%, the cost of capital is 12% for equipment sales and 10% for equipment servicing. a. Estimate the NPV of the equipment service center. b. The service center is expected to increase large equipment sales at the store by (2.5 points) 20% over the current level. Assuming that revenues from equipment sales would have been flat (unchanged) for the next five years and that the after-tax operating margin on these sales would remain at the existing level for that period, estimate the effect of this "synergy" on the NPV of the project. (1.5 points)
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