Steve's Sub Shop (Steve's) is considering investing in toaster ovens for each of its 120 stores located in the Southwestern United States. The high capacity conveyor toaster ovens, manufactured by Lincoln, will require an initial investment of $15,000 per store plus $1,500 in installation costs for a total investment of $1,860,000. The new capital (including the costs for installation) will be depreciated over five years using straight-line depreciation toward a zero salvage value. In addition, Steve's will also incur addtional maintenance expenses totaling $120,000 per year to maintain the ovens. At present, firm revenues for the 120 stores total $9,000,000 and the company estimates that adding the toaster feature will increase revenues by 10%.
a. If Steve's faces a 30% tax rate, what expected project FCFs for each of the next five years will result from the investment in toaster ovens?
b. If Steve's uses a 9% discount rate to analyze its investments in its stores, what is the project's NPV? Should the project be accepted?
There is a discrepancy in the data as 120 * ($15,000 + $1,500) = $1,980,000 while the total investment is indicated to equal $1,860,000. It is assumed that the $1,860,000 is correct which ...
This solution calculates a project valuation based on free cash flow.