Reference no: EM132462807

Problem - Karlas Inc Supply is considering expanding the existing store. Karla wants to lease the office space next door to her business. Karla must spend, $120,000 on equipment to expand. The equipment is expected to have a zero-salvage value and will be retired in 8 years. Karla expects to increase networking capital by $10,000 right now if she goes through with the expansion. Karla spent $12,000 last month on a survey of the area surrounding the shop to see if there was sufficient demand for a larger store. Karla estimates she will increase revenues by $100,000 per year in the new store for eight years. The direct expenses incurred to make those sales are $65,000, including rent. The lease she is considering signing is for 8 years. She will liquidate the $10,000 networking capital when the lease is complete in 8 years. Karla Inc Supply pays 40.0% in taxes, and has a cost of capital of 10.0%. How much does Karla need to expand her business at T=0?

1) $120,000

2) $123,000

3) $125,000

4) $128,000

5) $130,000