Problem:
The Leo Lip Company is considering opening a new store location that would be available for seven years until the lease expired. The project would require fixtures and equipment costing $276,000. The equipment has a 7 year useful life and estimated salvage value of 0. The equipment is considered 5 year class property of MACRS. The firm's marginal tax rate is 37%. Sales are expected to be $425,000 the first year and increase by 6% per year for hthe remaining years. Variable cost are estimated at 63% of sales revenue and fixed cost are estimated to be 104,000 per year, excluding depreciation. The firm's cost of capital is 8.76%
Required:
1. Calculate the annual cash flows.
2. Determine IRR and NPV of the project.