As weve examined in prior class periods, CIC is currently considering expanding operations. The first expansion planwhich weve worked on in a previous classcalls for the purchase of a physical location, remodeling of that location, and purchase of a freezer. The freezer would cost $4,289, have an estimated useful life of 7 years, and have a salvage value of $300. Purchase of the freezer would allow CIC to use the new building as a retail space.

In addition to that opportunity, CIC is also considering purchasing the building, but using it only as a center of operations (rather than as retail space). As a result, CIC would remodel the space, but purchase of the freezer would not be necessary. Instead, CIC would purchase a small ice cream stand. The stand would cost $7,000, have an estimated useful life of 7 years, and have no salvage value.

Both options would require additional working capital of $500, which will be recovered at the end of the life of each option.

Assume that CICs cost of capital is 8%.

Details about the operating cash flow for each year are below.

	Purchase freezer	Purchase stand
Estimated cash outflow per year	$9,000	$12,000
Estimated cash inflow:
Year 1	$9,600	$13,390
Year 2	$9,676	$13,390
Year 3	$9,761	$13,390
Year 4	$9,857	$13,390
Year 5	$9,965	$13,390
Year 6	$10,086	$13,390
Year 7	$10,223	$13,390

Compute the following for each option:

1. Net present value

2. Internal rate of return. For the sake of simplicity, for this computation only, (1) utilize the average net operating cash flow per year for the freezer purchase ($881.14) and (2) ignore working capital and salvage values for both options.

3. Present value index

4. Payback period

Based on your analysis, which option would you recommend that CIC pursue?

In the above analysis, we only considered differences between the freezer and stand. Why didnt we include information about the building or remodeling?