Question

Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $400,000 and be depreciated over a 5-year period on a straight-line basis to $0. The new store will require Benford to increase its net working capital by $350,000 at time 0. First-year sales are expected to be $1 million and to increase at an annual rate of 8 percent over the expected 10-year life of the store. Operating expenses (including lease payments and excluding depreciation) are projected to be $800,000 during the first year and increase at a 5 percent annual rate. The salvage value of the store’s equipment and fixtures is anticipated to be $20,000 at the end of 10 years. Benford’s marginal tax rate is 40 percent. Round your answers to the nearest dollar.

1. Compute the net investment required for Benford.

   $  

2. Compute the annual net cash flows for the 10-year projected life of the store.

   Year	NCF
   1	$
   2	$
   3	$
   4	$
   5	$
   6	$
   7	$
   8	$
   9	$
   10	$

3. Compute the annual net cash flows assuming equipment and fixtures are depreciated using the 7-year asset class under MACRS. Use Table 9A-3 to answer the question.

   Year	NCF
   1	$
   2	$
   3	$
   4	$
   5	$
   6	$
   7	$
   8	$
   9	$
   10	$

Answer 1

Deprecia tion Year Revenue Costs PBT 0 3 80,000 80,000 80,000 80,000 80,000 4 1,000,000 1,080,000 1,166,400 1,259,712 1,360,489 1,469,328 1,586,874 1,713,824 1,850,930 1,999,005 800,000 840,000 882,000 926,100 972,405 1,021,025 1,072,077 1,125,680 1,181,964 1,241,063 5 Cash flows Net from Working Tax@40% income Depreciation operations capital Investment (350,000) (400,000) 48,000 72,000 80,000 152,000 64,000 96,000 80,000 176,000 81,760 122,640 80,000 202,640 101,445 152,167 80,000 232,167 123,234 184,850 80,000 264,850 179,321 268,982 268,982 205,919 308,879 308,879 235,258 352,886 352,886 267,586 401,380 401,380 303,177 454,765 454,765 350,000 12,000 20000*(1-40%) 120,000 160,000 204,400 253,612 308,084 448,303 514,798 588,144 668,966 757,942 Net cashflows (750,000) 152,000 176,000 202,640 232,167 264,850 268,982 308,879 352,886 401,380 816,765 6 7 8 9 10 -$ 750,000 Net investment Year NCF 1 $ 152,000 2 $ 176,000 3 $ 202,640 4 $ 232,167 5 $ 264,850 6 $ 268,982 7 $ 308,879 8 $ 352,886 9 $ 401,380 10 $ 816,765

c)

Deprecia tion Year Revenue Costs PBT Investment (400,000) 0 3 4 1,000,000 1,080,000 1,166,400 1,259,712 1,360,489 1,469,328 1,586,874 1,713,824 1,850,930 1,999,005 800,000 840,000 882,000 926,100 972,405 1,021,025 1,072,077 1,125,680 1,181,964 1,241,063 57,160 97,960 69,960 49,960 35,720 35,680 35,720 17,840 Cash flows Net from Working Tax@40% income Depreciation operations capital (350,000) 57,136 85,704 57,160 142,864 56,816 85,224 97,960 183,184 85,776 128,664 69,960 198,624 113,461 170,191 49,960 220,151 140,946 211,418 35,720 247,138 165,049 247,574 35,680 283,254 191,631 287,447 35,720 323,167 228,122 342,182 17,840 360,022 267,586 401,380 401,380 303,177 454,765 454,765 350,000 5 142,840 142,040 214,440 283,652 352,364 412,623 479,078 570,304 668,966 757,942 Net cashflows (750,000) 142,864 183,184 198,624 220,151 247,138 283,254 323,167 360,022 401,380 816,765 6 7 8 9 10 Hhhhh 12,000 20000*(1-40%) Year 1 2 3 4 5 NCF $ 142,864 $ 183,184 $ 198,624 $ 220,151 $ 247,138 $ 283,254 $ 323,167 $360,022 $ 401,380 $ 816,765 6 7 8 9 10

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