(Time line; payback; NPV) Holly's Fashions is considering expanding its building so it can stock additional merchandise for travelers and tourists. Store manager Jill Eliason anticipates that building expansion costs would be $190,000. The ?rm's suppliers are willing to provide inventory on a consignment basis so there would be no additional working capital needed upon expansion. Annual incremental fixed cash costs for the store expansion are expected to be as follows:
|
Year
|
Amount
|
|
1
|
$20,000
|
|
2
|
27,000
|
|
3
|
27,000
|
|
4
|
27,000
|
|
5
|
30,000
|
|
6
|
30,000
|
|
7
|
30,000
|
|
8
|
33,000
|
Eliason estimates that annual cash in?ows could be increased by $60,000 from the additional merchandise sales, which is the contribution margin on the incremental sales. Because of uncertainty about the future, Eliason does not want to consider any cash ?ows after 8 years. The ?rm uses an 8 percent discount rate.
a. Construct a time line for the investment.
b. Determine the payback period. (Ignore taxes.)
c. Calculate the net present value of the project. (Ignore taxes.)