Erma’s Beauty Supply is considering expanding the existing store. Erma wants to lease the office space...

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Finance

Erma’s Beauty Supply is considering expanding the existingstore. Erma wants to lease the office space next door to herbusiness. Erma must spend, $120,000 on equipment to expand. Theequipment is expected to have a zero-salvage value and will beretired 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 tosee if there was sufficient demand for a larger store. Ermaestimates she will increase revenues by $110,000 per year in thenew store for eight years. The direct expenses incurred to makethose sales are $78,000, including rent. The lease she isconsidering signing is for 8 years. She will liquidate the $8,000networking capital when the lease is complete in 8 years. Erma’sBeauty Supply pays 40.0% in taxes and has a cost of capital of9.0%.
How much does Erma need to expand her business at T=0?
Based on this information, the project’s operating cash flow ineach of the first seven years is $_?
Based on this information, the project’s terminal year (year 8)total cash flow is $_?
What is Erma’s NPV if she decides to expand the business?

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4.3 Ratings (691 Votes)

12000 spent on survey is a sunk cost and will not beconsidered in NPV calculation This survey cost will never berecovered See Answer

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Erma’s Beauty Supply is considering expanding the existingstore. Erma wants to lease the office space next door to herbusiness. Erma must spend, $120,000 on equipment to expand. Theequipment is expected to have a zero-salvage value and will beretired 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 tosee if there was sufficient demand for a larger store. Ermaestimates she will increase revenues by $110,000 per year in thenew store for eight years. The direct expenses incurred to makethose sales are $78,000, including rent. The lease she isconsidering signing is for 8 years. She will liquidate the $8,000networking capital when the lease is complete in 8 years. Erma’sBeauty Supply pays 40.0% in taxes and has a cost of capital of9.0%.How much does Erma need to expand her business at T=0?Based on this information, the project’s operating cash flow ineach of the first seven years is $_______?Based on this information, the project’s terminal year (year 8)total cash flow is $_______?What is Erma’s NPV if she decides to expand the business?