Super Fresh Grocery operates a chain of 40 grocery stores. Currently, the company is considering starting a new division, FreshGrocer.com, to provide home delivery services. Customers will be able to order groceries by phone or using the Internet, and FreshGrocer.com will deliver them within 24 hours at a price guaranteed to be identical to the prices charged in the company's stores.

The company has projected revenue and cost related to this business for the next seven years as follows:

The business will require an initial investment in delivery trucks and other equipment of \(\$ 450,000\). The trucks and equipment will be depreciated over a seven-year life using straight-line depreciation with a residual value of \(\$ 100,000\).

Required
Assume that Super Fresh has decided to limit its analysis to seven years. Calculate the net present value of the new business using a 14 percent required rate of return. Should Super Fresh make the investment in the new business?

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Year 1 Revenue $1,600,000 Year 2 Year 3 $1,680,000 $1,725,000 Year 4 Year 5 Year 6 Year 7 $1,750,000 $1,840,000 $1,950,000 $2,060,000 Less Expenses: Cost of Merchandise 1,070,000 1,125,000 1,150,000 1,155,000 1,200,000 1,250,000 1,325,000 Salaries 300,000 315,000 330,750 347,288 364,652 382,884 402,030 Depreciation 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Miscellaneous 25,000 26,250 27,563 28,940 30,388 31,907 33,502 Total Expense 1,445,000 1,516,250 1,558,313 1,581,228 1,645,040 1,714,791 1,810,532 Income before taxes 155,000 Taxes at 40% Net income $ 62,000 93,000 163,750 65,500 $ 98,250 166,687 168,772 66,675 67,509 $ 100,012 $ 101,263 194,960 77,984 $ 116,976 235,209 249,468 94,084 $ 141,125 99,787 $ 149,681