B. A proposal to diversify into copy machines. The franchise was to cost $700,000, which would be amortized over a 40-year period. The new business was expected to generate over $1.4 million in sales over the next five years, and over $800,000 in after-tax earnings. (See Figure 2 for details.)

Compute the payback period, net present value (NPV), Profitability Index based on cash flow. Use 10 % the required rate of return (discount rate) in your calculations. For the payback method, merely indicate the year in which the cash flow equals or exceeds the initial investment. You do not have to compute midyear points

Year 5 Figure 2 Financial analysis of Project B: Diversify into copy machines Initial Year 1 Year 2 Year 3 Year 4 Expenditures Net cost of new franchise.......... $700,000 Additional revenue.. $ 87,500 $175,000 $262,500 $393.750 Additional operating costs 26,250 26,250 26.250 26.250 Amortization. 17.500 17.500 17.500 17.500 Net increase in income 43,750 131,250 218,750 350,000 Less: Tax at 33 14.438 43.313 72.188 115.500 Increase in aftertax income S 29.313 S87.938 $146.563 $234.500 Add back depreciation $ 17,500 $ 17,500 $ 17.500 $ 17,500 Net change in cash flow ($700,000) 46,813 105,438 164,063 252,000 $525.000 26,250 17.500 481,250 158.813 $322.438 $ 17,500 339,938