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Harrison Ventures has invested in a variety of retail outlets in key mall locations. Harrison is contemplating an investment in upgrading the furnishings and fittings of these properties. The upgrades will require an up-front investment of $100,000. Harrison estimates that they will yield incremental margins of $43,000 annually due to higher foot traffic and sales and require incremental cash maintenance costs of $15,000 annually. Harrison expects the life span of these improvements at 5 years and estimates a terminal disposal value of $20,000.
Harrison faces a 30% income tax rate. It depreciates assets on a straight-line basis (to terminal value) for tax purposes. The required rate of return on investments is 12%.
Required:
1. What is the expected increase in annual net income from investing in the improvements?
2. Calculate the accrual accounting rate of return based on average investment.
3. Is the project worth investing in from an NPV standpoint?
4. Suppose the tax authorities are willing to let Harrison depreciate the project down to zero over its useful life. If Harrison plans to liquidate the project in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the project
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