Data Mix needs to decide whether or not to invest in a new retail store. The store will cost $6M to build, it will have a useful life of 30 years, and will have salvage value of $1M. The store will have Gross Profit of 25% of sales, with fixed costs of $600K per year, and other variable costs of 12% per year. The company expects the new store to have sales of $12M per year, growing at 10% for the first 3 years, then levelling off to 2% growth per year. It will also drive additional sales for its online business. The cash flow generated for Data Mix is expected to equal about 1% of the store’s sales. Assume a tax rate of 35% and straight-line depreciation for 10 years. - Show all work on how you got the answer.
What discount rate should you use for your NPV analysis?
What is the NPV, IRR, and payback period of the project?
Should Data Mix pursue the project? Why or why not?