Quick Copy Stores (QCS) is considering opening a new store in a downtown office building. The owner of Quick Copy Stores has asked you to analyze the pertinent information and provide your advice regarding the opportunity. QCS will lease space in the office building. Equipment and fixtures for the store will cost $750,000 and be fully depreciated over a six-year period on a straight-line basis with zero salvage value. Net working capital, consisting mostly of supplies, will be $100,000 when the store opens but will be recovered at the end of the 6-year lease. Sales are expected to be $1,000,000 annually for the 6-year period. Operating expenses, including lease payments and personnel but excluding depreciation, are forecasted to be 75 percent of sales. The salvage value of the equipment and fixtures and the end of the 6 years is expected to be $100,000. QCSs marginal tax rate is 40% and its cost of capital is 12%.

1. What type of problem is this? Explain.

2. What decision criteria should be used?

3. What is the decision rule?

4. What advice will you give the owner? Why. Show your calculations.