Determine the payback period for the project

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Reference no: EM13120948

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 million 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 million 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 in 10 percent.

At the end of the store's life, the company expects to sell various fixtures and equipment for $2,000,000.

Required:
a) Determine the payback period for the project.
b) Determine whether or not the project should be undertaken using the net present value method

Reference no: EM13120948

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