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Explain Decision making based on the NPV and Profitable index and IRR criterion
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 five-year period on a straight-line basis to 0. The new store will require Benford to increase its net working capital by 200,000 at time 0; thereafter net working capital balances are expected to equal 20% of the following year's sales. First year sales are expected to be 1,000,000 and to increase to an annual rate of 8% over the expected 10-year life of the store. Operating expenses (including lease payments and excluding depreciation) are projected to equal 70% of sales. 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
1. Calculate the store's net present value, using an 18% required rate of return
2. Should Benford accept the project?
3. Calculate the store's internal rate of return
4. Calculate the store's profitability index
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