Teresa’s Tanning Salon expects annual sales of $175,000, annual fixed cash outlays are $57,000 a year at each location, variable cash outlays are 25 percent of sales, depreciation is $15,000 per year, and taxes are 32% (of pretax income). Initial outlay for the building is $440,000. The company does its analysis based on a 10-year store life. We believe the business can be sold for $500,000 after taxes (disposal value) at the end of its 10 year life.
a) Using an 8% required return, what is the net present value of this venture?
b) What annual sales volume is needed to generate a net present value of $0?