Introduction to Finance

a. 
Find project X’s initial cash outlay.
b. 
Find the project’s operating cash fl ows over the fi ve-year period.
c. 
If the project’s required return is 12 percent, should it be im-
plemented?
15. 
Challenge Problem
You are considering becoming a franchisee 
with the Kopy-Kopy Copy and Pizza Delivery Service. For $50,000, 
they give you training and exclusive territorial rights. 
Equipment can be purchased through the home offi
ce for an 
additional $50,000, all of which will be straight-line depreciated. The 
home offi
ce estimates your territory can generate $100,000 in sales 
volume in the fi rst year and sales will grow 10 percent in each of the 
following four years, at which time you plan on selling the business 
for $50,000, after taxes. From reading their brochures and talking to 
several other franchisees, you believe costs, excluding depreciation, 
are about 60 percent of sales. You also know the home offi
ce requires 
you to pay a 15 percent royalty on your gross sales revenue.
Using a 30 percent tax rate and a 10 percent return requirement, 
how will this opportunity aff ect your personal wealth?
16. 
Challenge Problem
The ice cream shop described in the text 
has been a smash success. Customers from the next college town 
are pleading with you to open one closer to them. Based on your 
operating experience and knowledge of local real estate, you believe 
opening a new ice cream shop will require an investment of $20,000 
in fi xed assets and $3,000 in working capital. Fixed assets will be 
straight-line depreciated over fi ve years. Preliminary market research 
indicates sales revenue in the fi rst year should be about $50,000 
and variable costs, excluding depreciation, will be about 80 percent 
of sales. To be on the safe side, you assume sales revenue will not 
change over the next fi ve years. At the end of fi ve years, you estimate 
you can sell your business, after taxes, for $25,000. Using a 28 per-
cent tax rate and a 12 percent required return, should you expand?