A Video Rental Store Will Cost $650,000 to Open

Essay

A video rental store will cost $650,000 to open.Assuming annual sales of $1 million, variable costs of 35 percent, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35 percent, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12 percent cost of capital.Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by plus/minus 10 percent from their original estimates.Which variable appears to affect profitability the most? What does the sensitivity analysis suggest the investor do?