Right-Way Stores is a chain of home improvement stores with 150 locations.Right-Way has identified an attractive site for a new store and Jim Smith, Director of Financial Planning, has been asked to prepare a analysis and make a recommendation for or against opening this proposed new store.

In preparing his analysis, Smith has determined that the land at the proposed site will cost $500,000 and the new store will cost $3.5 million to build.The building contractor requires full payment at the start of construction, and it will take one year to build the store.Right-Way will finance the purchase of the land and construction of the new building with a 40-year mortgage. The mortgage payment will be $118,000 payable annually at year end.Fixtures for the store are estimated to cost $100,000 and will be expense.Inventory to stock the store is estimated to cost $100,000.Concerned about the possibility of rising prices, the company expects to purchase the fixtures and inventory at the start of construction. Advertising for the grand opening will be $50,000, paid to the advertising agency on retainer at the start of construction.The new store will begin operations one year after the start of construction.

Right-Way will depreciate the building over 20 years on a straight-line basis, and is subject to a 35% tax rate.Right-Way uses a 12% hurdle rate to evaluate projects.The company expects to earn after-tax operating income from the new store of $1,200,000 per year.

1. What is Right-Way's total initial cash outflow?Show your calculations.
2. Calculate the annual expected cash flow from the proposed new store.Show your calculations.
3. Right-Way management evaluates new stores over a five-year horizon as management believes there is too much uncertainty after 5 years of operation.Calculate the Net Present Value (NPV) for the store for the first 5 years of operation.Show your calculations.
4. How would you use sensitivity analysis to test your confidence in the recommendation?No calculations are required.