7. Ms. Flo N. Lowe, a project analyst at Grounded Aircraft, would like her idea of on-board gift shops included in next years capital budget. According to her report, the following can be expected in each of the five years of the gift shops expected life. (answer parts a, b and c)

Year 0 Years 1-5

Investment $200,000

Sales $550,000

Variable costs@ 75% 412,500

Fixed costs 30,000

Depreciation 40,000

Pretax Profit 67,500

Taxes @ 21% 14,175

After-tax Profits 53,325

Depreciation 40,000

Cash Flows 93,325

Assume the cost of capital is 15% and the tax rate is 21%.

NPV = $112,839.87

A) What would the net present value be if the investment turns out to be $300,000 instead of $200,000 (assume straight line depreciation) and would you accept the project?

B) Instead, what if airline travel takes off and sales come in at $750,000 per year (variable costs remain at 75% of sales)? What would be the new net present value?

C) Instead, assume that a rival (Jet Black, In is working on a similar project. If they can develop their product, you project that your sales estimate will be 10% lower than originally thought and that your variable costs will rise to 77% of sales due to higher promotional costs. Calculate NPV and determine if you should go ahead with the project?