After discussing the business online experts in the type of retail grocery business they anticipate that after costs the cash flow coming into the online store will increase the sale by 550,000 a year. The immediate cost necessary to establish the online processing software will cost 4,000 and it can have a useful life of five years. The internet company charges 6,000 for installing a new online network (line) and 1,600 a year for the line. The online delivery is needed a fleet of new delivery vans and the vans cost 250,000. The vans can be financed for 5 years with a 40% down payment. The bank will offer finance for the vans through a loan at 5% compounded monthly with monthly payment of 2,830.69. The company will need to recruit for part time van delivery drivers to carry out the delivery of catering products and it costs 5,000 a year. The vans have a useful life of five years and it depreciates straight line for five year. It assumes that the salvage value on the new vans is equal to 25% of the total cost of vans and that the straight line depreciation method is appropriate to estimate the depreciation expense per year. The annual depreciation expense in the companys income statement is calculated at 20% of annual depreciation. It should be noted that the company has a 20% tax rate for its profits.

The van maintenance expense and insurance will cost 3,000 a year. The weighted average cost of capital is calculated at 8%. FoodPlanet has assumed a decrease in sales from the physical grocery shopping if this plan goes ahead due to customers moving from physical groceries to electronic ones. Further, the financial advisor reckons the decrease in sales will amount to 430,000 a year. The financial advisor believes there will be no significant inflation over the next five years and therefore have not included inflation in the above figures. FoodPlanet has some debt and its shares are not quoted on the stock market. If the proposal was to go ahead then the company would need to raise additional finance. The financial advisor has not recommended which way to go with regards to the choice of financing.

REQUIRED:

Q1: Prepare a schedule of cash flows for the project. Calculate, using the information available, the Net Present Value of the proposal to sell online shopping and run online store. Include in your answer a justification for whether or not you recommend FoodPlanet to go ahead with this proposal. In this question you are required to critically discuss the effect of the cost of capital on financial decisions.

Q2: Calculate the payback period for the proposed project to run online store, if the company has a policy of only accepting projects with payback of less than three years, would this be accepted? Comment on the suitability of the payback method for the new investment and comment how to develop an appropriate payback year for the new project.