Question
You are considering entering into a 3-year lease to rent space in Scottsdale for $20,000 per year to open the Xaragua wine store. You would
You are considering entering into a 3-year lease to rent space in Scottsdale for $20,000 per year to open the Xaragua wine store. You would have to invest $5,000 in for store fixtures (which would be depreciable straight-line over 5 years) and pay $50,000 per year to one employee. You would also need to keep 10,000 bottles of wine in inventory at all times and maintain a $20,000 cash balance. After 3 years, you will close the store, the store fixtures will be worthless, and you can recover any investments in working capital. The tax rate is 40%. You expect to sell 5,000 bottles per year with an average selling price of $40 per bottle and an average cost of $20 per bottle. (Show work on the paper below or go ahead and use a new worksheet in the Excel file.)
Since revenues and expenses are expected to be the same each year, net income is expected to be the same each year. Calculate net income in the first year.
If you require a 20% IRR would this project be acceptable? What is the IRR?
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