(20 Marks) Homantin, Inc. is considering a project for opening a new sporting goods store in a suburban...

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Finance

(20Marks)
Homantin, Inc. is considering a project for opening a newsporting goods store in a suburban mall. Homantin will lease theneeded space in the mall. Equipment and fixtures for the store willcost $600,000. It is the accounting policy of the company todepreciate equipment and fixtures over a 5-year period on astraight-line basis with no residual value. However, the managerexpects equipment and fixtures to be sold at $20,000 at the end of5 years. The new store will require Homantin to increase its networking capital by $200,000 when the project is launched.First-year sales are expected to be $1,000,000 and to increase atan annual rate of 7 percent over the expected 5-year life of thestore. Operating expenses (including lease payments and excludingdepreciation) are projected to be $800,000 during the first yearand increase at a 6 percent annual rate. Homantin’s marginal taxrate is 35 percent and Homantin needs to pay capital gain tax.Assume that the required rate of return for Homantin is 15%.
Required:
(a)
Evaluate the initial outlay of the project.
(b)
Analyze the annual net cash flows for the first 4 years of theproject. Please show your calculation steps in a table.
(c)
What is the annual net cash flow at the end of the project?
(d)
Discuss whether you would accept or reject the project if therequired payback period is 4 years.
(e)
How about your decision if profitability index and internal rateof return are employed, respectively?
(f)
What would be your decision if the net present value rule isused?

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3.7 Ratings (442 Votes)

Answer aInitial outlay of the project Cost of equipment and fixtures increase in net working capital 600000 200000 800000Initial outlay of the See Answer

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(20Marks)Homantin, Inc. is considering a project for opening a newsporting goods store in a suburban mall. Homantin will lease theneeded space in the mall. Equipment and fixtures for the store willcost $600,000. It is the accounting policy of the company todepreciate equipment and fixtures over a 5-year period on astraight-line basis with no residual value. However, the managerexpects equipment and fixtures to be sold at $20,000 at the end of5 years. The new store will require Homantin to increase its networking capital by $200,000 when the project is launched.First-year sales are expected to be $1,000,000 and to increase atan annual rate of 7 percent over the expected 5-year life of thestore. Operating expenses (including lease payments and excludingdepreciation) are projected to be $800,000 during the first yearand increase at a 6 percent annual rate. Homantin’s marginal taxrate is 35 percent and Homantin needs to pay capital gain tax.Assume that the required rate of return for Homantin is 15%.Required:(a)Evaluate the initial outlay of the project.(b)Analyze the annual net cash flows for the first 4 years of theproject. Please show your calculation steps in a table.(c)What is the annual net cash flow at the end of the project?(d)Discuss whether you would accept or reject the project if therequired payback period is 4 years.(e)How about your decision if profitability index and internal rateof return are employed, respectively?(f)What would be your decision if the net present value rule isused?

(a)	Evaluate the initial outlay of the project.
(b)	Analyze the annual net cash flows for the first 4 years of theproject. Please show your calculation steps in a table.
(c)	What is the annual net cash flow at the end of the project?
(d)	Discuss whether you would accept or reject the project if therequired payback period is 4 years.
(e)	How about your decision if profitability index and internal rateof return are employed, respectively?
(f)	What would be your decision if the net present value rule isused?