Question
7. Your 2 cousins, Ahmad, and Youssef, are thinking about opening a coffee-shop in Alasala campus. The initial investment is not that big - just
7. Your 2 cousins, Ahmad, and Youssef, are thinking about opening a coffee-shop in Alasala campus. The initial investment is not that big - just 300,000 SAR but your cousins need to pay a royalty of 15% of the revenues to be obtained every year to the Alasala owner. The following table provides information about the revenues and costs estimated by your cousins for the current year of 2023, 2024, 2025, 2026, 2027 and 2028 (assume that the initial investment is fully paid in the beginning of 2023 and that the profit estimated to 2028 will repeat itself for the following years). The investment will be totally financed by a bank loan with an annual interest rate of 5.5%.
a) What is the expected annual profit of the project for each year? b) What is the project's expected Net Present Value (NPV)? c) Is the project's expected Internal Rate of Return (IRR) greater, equal to or smaller than the discount rate? Please justify your answer.
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