5. Rick has been doing very well with his baking business. He needs to look at other avenues to keep up with growing demand. Working out of his house the last year, he found that he would sell about $5,000 of baked goods in revenue a month. The direct expenses he had were about 20% of revenue. He had no other expenses, but he has absolutely destroyed his house and his wife said he needs to set up the business elsewhere. Additionally, they need to take out $20,000 of their retirement savings TODAY to refurnish the house and kitchen. Rick has a few options here that he is trying to figure out. Respective required rate of returns are espoused as well. Option 1, RRR = 6.5%: He can rent out a small kitchen two days a week to prep his goods and then sell his items at the local farmer's market. Renting the kitchen will charge $100 per day used. The farmer's market has a stand fee of $150 per session. He estimates that he will be able to average about $7,500 of revenue a month. The direct expenses are the consistent 20% of revenue. Option 2, RRR = 7.8%: He can rent out a small bakery out of a local coffee shop in agreement that he will sell all the baked goods with the coffee they sell. The rental cost is $2,500 a month. He will need to hire another employee to help out who will work 30 hours a week and earns $12.00/hour. He expects that he will on average, earn about $10,500 of revenue a month. The direct expenses are the consistent 20% of revenue. Additionally, the local coffee shop takes out 10% of revenue. Option 3, RRR = 10.3%: He can purchase a food truck and get licensing to sell baked items every day. He will need to take out a loan of $40,000 to purchase the truck. It will be a 5-year loan with 0% down payment. The quoted interest rate the bank gives is an annual 12%. He will need to hire another two employees to help out who will work 30 hours a week (each) and earns $12.00/hour. Additionally, he pays licensing fees to the city of $3,000 a month. He expects that he will on average, earn about $17,800 of revenue a month. The direct expenses are the consistent 20% of revenue. Option 4, RRR 14.8%: He can purchase a vacant property to build a bakery. He will need to take out a loan of $1,100,000 to purchase the space and pay for set-up. It will be a 15-year loan with 20% down payment. The quoted interest rate the bank gives is an annual 7%. He will need to hire another three employees to help out who will work 30 hours a week (each) and earns $12.00/hour. He has annual maintenance expenses and fees of $21,500 a year. He expects that he will on average, earn about $32,900 of revenue a month. The direct expenses are the consistent 20% of revenue. a) Give me a qualitative breakdown of the costs. What costs do we need to consider? Which costs do we not consider? b) Calculate the PMT of the loan in Options 3 and 4. Show the loan amortization table. c) Show a monthly cash flow diagram for each option only for the first 36 months (3 years). Assume what is given monthly is incurred monthly. Assume what is given annually is incurred at the end of the year (end of 12 months). What is the NPV for each? What is the IRR for each? d) Show an annual cash flow diagram for each option for the first 20 years. Convert anything monthly into annual figures. Whatever is annual is as is. What is the NPV for each? What is the IRR for each? e) What is the duration of each? What is the modified duration of each? 1) Which option is best? Go beyond the financials we have calculated, what would you do if you were Rick and why? (think opportunity cost and opportunities)