problem: XYZ, Inc. is planning to open a new sporting goods store in a suburban mall. XYZ will lease the needed space in the mall. Machine and fixtures for the store will cost 200,000 and be depreciated over a five-year period on a straight line basis to 0. The new store will require XYZ to increase its net working capital by 200,000 at time 0; thereafter net working capital balances are expected to equal 20 percent of the following year's sales. 1st year sales are expected to be 1,000,000 and to increase to a yearly rate of 8 percent over the expected ten year life of the store. Operating costs [including lease payments and excluding depreciation] are projected to equal 70% of sales. The salvage value of the store's machine and fixtures is anticipated to be 10,000 at the end of ten years. XYZ 's marginal tax rate is 40.
[A] Compute the store's internal rate of return.
[B] Compute the store's profitability index.
[C] Compute the store's net present value, using an 18 percent required rate of return.
[D] Should XYZ accept the project?