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Fairfield estimates that its Gross profit will be approximately 60% of sales, its Operating expenses will be 30% of sales and its support overhead
Fairfield estimates that its Gross profit will be approximately 60% of sales, its Operating expenses will be 30% of sales and its support overhead at 10% of sales. Depreciation, which is not included in the operating expenses, is estimated to be $95,000 per year. The owner is seeking $1,600,000 for all the assets and rights under the respective leases. The $1,900,000 ($1,600,000 cost and $300,000 of remodeling) will be depreciated using straight line method over a 20 year life to a salvage value of zero. It is expected that the stores could be resold for 120% of expected sales in year 5. Should Fairfield undertake the acquisition? What is the Coefficient of Variation? If the Coefficient of Variation indicates that this is a high risk project and if high risk projects should have 2.5% added to the WACC, then should this project be accepted? (Assume in the final analysis that this is a high risk project and 2.5% should be added to the WACC.)
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