Net Present Value for the American Book
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American Book and Periodical (ABP) is considering an old proposal to put coffee shops in each store for which they paid an outside firm $1 million to design a standardized facility that could go in each of their 1,200 stores. A national coffee house chain would pay for the installation cost of $250,000 per store and operate these. The national coffee house chain would pay NBPS $300,000 annual rental per store. The implementation to all stores would take three years with 1/3 of the stores being opened each year starting in 2011. Each Book store's revenue is expected to increase by $100,000 per store essentially forever once the coffee shop is installed. The COGS is 60% for printed books. Consider the coffee shops as operating for the full year in which they are installed starting in 2011. No change in working capital is expected.
If the rate used for ABP investment proposals is 10% and the tax rate is 35%, what is the net present value and should the coffee shop project proposal be approved?
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The net present value for the American Book is examined in the solution.
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