Lisa is considering the purchase of a boutique near her house (the owner is retiring). The sellers asking price is $200,000 for building and equipment. If purchased, Lisa must tie up $40,000 in working capital (inventory and cash) which will be released at the end of project. At the end, she expects to sell the store for $120,000. Lisa is planning to put $40,000 of her own money and borrow $200,000 at a rate of 10% from bank. She desires a 12% return on her own money. Interest paid to bank results in tax shield. Lisa is subject to 25% income taxes. The store requires overhaul and remolding in Year 5, Year 10, and Year 15. Cost of each overhaul is expected to be $6000, $8,000, and $10,000, respectively. Lisa is thinking to hold the business for 20 years. The projected cash revenues for Year 1 are $90,000. She thinks the annual cash revenues will increase 6% every year up to Year 10 (prior year revenue plus 6% of it). Starting from Year 11, she expects the annual cash revenues to stay the same. The projected cash expenses for Year 1 are $75,000. She expects annual cash expenses will increase 3% every year after Year 1 (prior year expense plus 3% of it). Lisa is subject to 25% income taxes. Requirements: 1. On the 1st Tab of Excel file named Cost of Capital, compute Lisas cost of capital for this investment if perused. The money borrowed is subject to tax shield. Lisa is subject to 25% income taxes. 2. On the 2nd Tab of the Excel file, complete the Data Section based upon the information in the above. 3. Compute Net Present Value and Internal Rate of Return of the proposed project and place your answers in the space provided on the Excel sheet highlighted in yellow. Ignore income taxes. 4. Assume the applicable depreciation period under MACRS for this investment is six-year. The depreciation rate for each of the six years are stated on the Excel. Compute Net Present Value and Internal Rate of Return of the proposed project and place your answers in the space provided on the Excel sheet and highlighted in yellow. 5. Based on your computations, should Lisa invest on this project? Why? Put your answer in the space provided on the Excel sheet. Your answer should demonstrate your understanding of the subject matter. Note: Interest paid on loan to bank should not affect your computations for parts 3 and 4 because it is buried in the cost of capital.

Cost of Capital Computation
Source of Capital	Amount	Rate
Her Own Money	$40,000	12%
Borrowing	$200,000	10%

Capital Budgeting

Data Section

Cash Flows:

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

Year 16

Year 17

Year 18

Year 19

Year 20

Cash Revenues

$90,000

Cash Operating Expenses

$75,000

Depreciation Rates

1st year

26.25%

2nd year

22.13%

3rd year

16.52%

4th year

16.52%

5th year

16.52%

6th year

2.06%

Total

100%

Answer Section

Part (2)

Answers:

Net Present Value

Internal Rate of Return

Part (3)

Net Present Value

Internal Rate of Return

Part (4)

Place Your Computations Below This Row