A video rental store will cost $650,000 to open. Assuming annual sales of $1 mil

Question

A video rental store will cost $650,000 to open. Assuming annual sales of $1 million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35%, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12% cost of capital. Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by +10%, - 10% from their original estimates. Which variable appears to affect profitability the most?

Explanation / Answer

NPV = Net Present Value

Initial Cash Out Flow $650,000 Sensitivity Analysis +10% Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Year 1 2 3 4 5 6 7 8 9 10 Sales 1000000 1100000 1210000 1331000 1464100 1610510 1771561 1948717 2143589 2357948 Variable Costs 350000 385000 423500 465850 512435 563678.5 620046.4 682051 750256.1 825281.7 Fixed Costs 300000 330000 363000 399300 439230 483153 531468.3 584615.1 643076.6 707384.3 Depreciation 100000 100000 100000 100000 100000 100000 50000 Profit 250000 285000 323500 365850 412435 463679 570046 682051 750256 825282 Tax 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 Profit After Tax 162500 185250 210275 237802.5 268082.8 301391 370530.1 443333.1 487666.5 536433.1 Calculation of NPV Year Profit Present Value Factor @12% Coloum 2*3 1 162500 0.8929 145096 2 185250 0.7972 147681 3 210275 0.7118 149674 4 237803 0.6355 151123 5 268083 0.5674 152110 6 301391 0.5066 152685 7 370530 0.4523 167591 8 443333 0.4036 178929 9 487666 0.3606 175853 10 536433 0.322 172731 Total 1593474 Initial Cash Out Flow 650000 NPV 943474 Sensitivity Analysis -10% Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Amount($) Year 1 2 3 4 5 6 7 8 9 10 Sales 1000000 900000 990000 1089000 1197900 1317690 1449459 1594405 1753845 1929230 Variable Costs 350000 315000 346500 381150 419265 461191.5 507310.7 558041.7 613845.9 675230.5 Fixed Costs 300000 270000 297000 326700 359370 395307 434837.7 478321.5 526153.6 578769 Depreciation 100000 100000 100000 100000 100000 100000 50000 Profit 250000 215000 246500 281150 319265 361192 457311 558042 613846 675230 Tax 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 Profit After Tax 162500 139750 160225 182747.5 207522.3 234774.5 297251.9 362727.1 398999.8 438899.8 Calculation of NPV Year Profit Present Value Factor @12% Coloum 2*3 1 162500 0.8929 145096 2 139750 0.7972 111409 3 160225 0.7118 114048 4 182748 0.6355 116136 5 207522 0.5674 117748 6 234774 0.5066 118937 7 297252 0.4523 134447 8 362727 0.4036 146397 9 399000 0.3606 143879 10 438900 0.322 141326 Total 1289423 Initial Cash Out Flow 650000 NPV 639423 Note:- Depreciation depends up on Investment and the Investment is $650000, So the Depreciation is Confined to $650000

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