Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 1: You are the owner of a building materials outlet, and you are considering adding a garden supplies section to your store. The
Question 1: You are the owner of a building materials outlet, and you are considering adding a garden supplies section to your store. The cost of the expansion will be $1.5 million, to be depreciated over its 4-year life, using straight line depreciation to an expected salvage value of $500,000 at the end of the 4th year. The garden supplies are expected to generate revenues of $600,000 in the 1st year. S 650,000 in the 2nd year, $700,000 in the 3rd and 4th years. The expenses of operating the garden supplies section are expected to be 40% of revenues each year and the tax rate is 35%. Working capital requirements are expected to be 10% of revenues (made at the beginning of each period). The cost of capital (WACC) is 9% a) Estimate the total initial investment for this project (CF) (1 mark) b) Estimate the operating free cash flows to the firm (FCFF) on the project for the next 4 years (use tabular format, starting with Revenue and label each item). Do not include any initial or termination cash flows here. (5 marks) Year 4 YEARS Year 1 Year 2 Year 3 Revenue c) Estimate the termination cash flows (CF4) on this project (not included in the above operating cash flows). (2 marks) d) Calculate the NPV on this project. (1 mark) e) Explain how the NPV tool is consistent with the goal of the firm. (I mark)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started