USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4 QUESTIONS Erma’s Beauty Supply is considering expanding the existing...

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USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4QUESTIONS
Erma’s Beauty Supply is considering expanding theexisting store. Erma wants to lease the office space next door toher business. 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 $8,000networking capital when the lease is complete in 8 years. Erma’sBeauty Supply pays 40.0% in taxes and has a cost of capital of9.0%.
38. How much does Erma need to expand her business atT=0?
39. Based on this information, the project’s operatingcash flow in each of the first seven years is$_?
40. Based on this information, the project’s terminalyear (year 8) total cash flow is $_?
41. What is Erma’s NPV if she decides to expand thebusiness?

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4.4 Ratings (874 Votes)

38 How much does Erma need to expand her business at T0 C0 Equipment cost investment in working capital 120000 8000 128000 39 Based on this information the See Answer

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USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4QUESTIONSErma’s Beauty Supply is considering expanding theexisting store. Erma wants to lease the office space next door toher business. 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 $8,000networking capital when the lease is complete in 8 years. Erma’sBeauty Supply pays 40.0% in taxes and has a cost of capital of9.0%.38. How much does Erma need to expand her business atT=0?39. Based on this information, the project’s operatingcash flow in each of the first seven years is$_______?40. Based on this information, the project’s terminalyear (year 8) total cash flow is $_______?41. What is Erma’s NPV if she decides to expand thebusiness?