Question
USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4 QUESTIONS Ermas Beauty Supply is considering expanding the existing store. Erma wants to lease the office
USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4 QUESTIONS
Ermas Beauty Supply is considering expanding the existing store. Erma wants to lease the office space next door to her business. Erma must spend, $120,000 on equipment to expand. The equipment is expected to have a zero-salvage value and will be retired in 8 years. Erma expects to increase networking capital by $8,000 right now if she goes through with the expansion. Erma spent $12,000 last month on a survey of the area surrounding the shop to see if there was sufficient demand for a larger store. Erma estimates she will increase revenues by $110,000 per year in the new store for eight years. The direct expenses incurred to make those sales are $78,000, including rent. The lease she is considering signing is for 8 years. She will liquidate the $8,000 networking capital when the lease is complete in 8 years. Ermas Beauty Supply pays 40.0% in taxes and has a cost of capital of 9.0%.
38. How much does Erma need to expand her business at T=0?
39. Based on this information, the projects operating cash flow in each of the first seven years is $_______?
40. Based on this information, the projects terminal year (year 8) total cash flow is $_______?
41. What is Ermas NPV if she decides to expand the business?
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