Question
Your firm owns a Mercedes dealership, and you are considering entering into a 5-year agreement to also sell Mercedes C-Class cars. The car would cost
Your firm owns a Mercedes dealership, and you are considering entering into a 5-year agreement to also sell Mercedes C-Class cars. The car would cost 28,000 and you believe that you can sell 50 cars per year at an average price of 34,000. You would have to hire 2 new sales people that you would pay 28,000 per year each year plus 5% of the revenue they generate. Mercedes would require that you invest 180,000 (depreciable straight line over 5 years) in Mercedes related signage, equipment and furniture to place in your dealership. You would also be required to invest in 20 cars to keep in inventory over the life of the project. After 5 years, you can recover your investment in working capital, and the unneeded equipment would have a market value of 40,000 (assuming no tax is applied on this sale). Your firm requires a 12% return on all new investments and the tax rate is 40%. Calculate the NPV (Net present value). Should you accept the project?
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