You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6®

Question

You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6® and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,000 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $30,000,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2,000,000 in additional working capital immediately, and recover it at the end of the investment. Your firm’s marginal tax rate is 30 percent. The opportunity cost of opening up the store is 10 percent. What is the NPV for the new store opening?

Explanation / Answer

Thus, NPV for the new store opening is $ 12,950,929.

Working:

Depreciation =Initial Investment/No. of Years

                     = 30,000,000/20

                     = 1,500,000

SlimBody Incorporation Exercise Machine Accessories Total ($) Sale Quantity              5,000 Sale Price per quantity              2,500 Total Sales Amount    12,500,000          600,000    13,100,000 Less:Operating Expenses      6,250,000 Less:Depreciation      1,500,000 Profit before tax      5,350,000 Less:Tax @ 30%      1,605,000 Profit after tax      3,745,000 Add:Depreciation      1,500,000 Annual Cash Inflow A      5,245,000 Cumulative discount factor upto 20 Years B              8.514 Present Value of Cash inflow from Operation upto 20 Years C=A*B    44,653,642 Release of Working Capital at the end of 20 Year D      2,000,000 Discounting Factor of 20th Year E              0.149 Present Value of Cash inflow from Working Capital F=D*E          297,287 Present Value of Total Cash Inflow G=C+F    44,950,929 Intial Investment Of Project H    30,000,000 Intial Working Capital Investment I      2,000,000 Present Value of Total cash outflow J=H+I    32,000,000

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