3You are considering opening a premium lemonade stand on the corner of Main and Anywhere Street in your hometown.

You have determined that you will need $1,025 to buy equipment, a table, two chairs and other sundry items to get started. Youll also need $250 in the bank to make change with customers and purchase lemonade drink mix in a variety of flavours, including traditional lemonade, strawberry, cherry and grape flavours. Each cup of lemonade that you sell will be priced at $9.99 (after all this lemonade is made from your grandmothers secret recipe).

Sales in year 1 are estimated to be 100 cups, and you predict that sales will rise by 20% annually between in years 2 and 5. Direct materials costs are estimated to be 50% of annual sales and direct labour costs 20% of annual sales.

Fixed preparation costs will be $250 annually.

You are financing the business with a single $500 par value bond issued to your parents at a price of 135. The bond has a 10% coupon rate, and a term of 5 years. You have also issued 600 common shares to other family members at a price of $1 per share.

You recently read in the Times of Anywhere (a local newspaper) that risk free investments are offering an 8% return, and that the beta on lemonade stands is .80. The expected return in the premium lemonade market is 10%.

You have also confirmed with your accounting professor that the companys tax rate will be 10%, and the depreciation rate on lemonade stands is 15%.

Finally, your research has also determined that lemonade stands are predicted to have a perpetual growth rate of 2% after the first five years of operation.

5.

A

Based on the information in the case, the NPV of your lemonade stand is approximately $_______.

1. $6,500
2. $8,500
3. $4,000
4. $10,000

Answer:

B

Based on the information in the case, the IRR of your lemonade stand is approximately ________%.

1. 5.71%
2. 10.00%
3. 54.00%
4. 18.00%

Answer:

C

If the net cash flows from a project, such as your lemonade stand were constant, and paid at the beginning of the year, your lemonade stand would effectively be a ________________.

1. Annuity due
2. Ordinary annuity
3. Growth annuity
4. Continuous annuity

Answer:

D

An ordinary perpetuity is the ________________________________________________.

1. Flux capacitor of finance
2. Flux capacitor of accounting
3. Buzz light-year of marketing
4. Buzz light-year of finance

Answer: