Problem:

Benford, Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated over a 5-year period on a straight-line basis to $0. The new store will require Benford to increase its networking capital by $200,000 at time 0. First-year sales are expected to be $1 million and to increase at an annual rate of 8 percent over the expected 10-year life of the store. Operating expenses (including lease payments and excluding depreciation) are projected to be$700,000 during the first year and increase at a 7 percent annual rate. The salvage value of the store's equipment and fixtures is anticipated to be $10,000 at the end of 10 years. Benford's marginal tax rate is 40 percent.

Required:

Question 1: Compute the net investment required for Benford.

Question 2: Compute the annual net cash flows for the 10-year projected life of the store.

Question 3: Compute the annual net cash flows assuming equipment and fixtures are depreciated using the 7-year asset class under MACRS.

Note: Show all workings.