The cost of building a new Starbucks store is 2 million dollars. The expected sa

Question

The cost of building a new Starbucks store is 2 million dollars. The expected sales are 1.2 million each year, also, the costs (all included) are 0.6 million per year. The tax rate is 35%. The project is evaluated assuming a 5 year life. Also, the sales and costs are the same every year. The idea is to calculate the Net Present Value and Internal Rate of Return for this project. To give you partial credit I will divide the question into sub questions. For this question, what is the yearly depreciation for the store? Remember depreciation is investment divided by the total number of years the project lasts and it is the same every year. Express the result in millions.

Explanation / Answer

Total Initial Investment = $ 2 million, Project Life = 5 years

Annual Depreciation = Initial Investment / Project Life = 2 / 5 = $ 0.4 million

NOTE: Only annual depreciation has been calculated in this solution as has been asked.

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