Question: For Denver Doughnuts, fixed cash outlays art $18,750 a year at each location, and variable cash outlay are 40 percent of sales. A store requires initial outlay of $60,000, and the company uses 14% required return. Because of changing neighborhood characteristics, the company does its analysis based on a 10-year store life. Since the locations are leased, the terminal value is minimal. Ignore taxes for simplicity.
a. What annual sales volume will be needed to generate a net present value of $0?
b. The after tax risk free interest rate is 6%. What annual sales value will be needed to generate a net present value of $0 using 6% discount rate?