The NPV of the project

  1) Your T-shirt store is considering opening a new coffee shop and to operate the shop over the next ten years. The coffee shop will occupy space next door in the same building. That space is currently being rented out to a tenant for $50,000 per year (paid at the end of each year). If you open the coffee shop, you will not be able to rent out the space and you will forgo the $50,000 rental income per year over the next ten years (starting in one year). The project will require an upfront investment of $200,000 today to pay for new equipment. This capital investment can be expensed for tax purposes. At the end of the ten years, the store believes it can sell the equipment for $20,000. The store expects the new coffee shop to generate sales from the project of $200,000 one year from today. Sales are expected to grow at an annual rate of 8% over the next 10 years. Costs of goods sold amount to 25% of sales. Selling, general, and administrative costs amount to 35% of sales. The project will require an investment in net working capital of 10% of sales, to be in place at the beginning of each year (working capital in year 0 is based on the sales in year 1). The T-shirt shop expects to be profitable in the future and to incur a marginal corporate tax rate of 20%. You plan to finance the project with 60% equity and 40% with debt. Your bank offers you a loan with a fixed interest rate of 6%. The probability that you will default in each year on this loan is 1% and if you default creditors expect to recover 50% of the loan principal. You estimate the equity beta of the project to be 1.2, the Treasury rate to be 4%, and the market risk premium to be 6%. A) Compute the NPV of the project. Include a table that derives the cash flows for each year. B) The assumptions above state that sales grow at a rate of 8% per year. You are not completely sure about this assumption. What is the breakeven growth rate of sales revenues?