Question
B&N management is considering adding a caf a complementary line of business at one of their bookstores. The initial cost of remodeling a portion of
B&N management is considering adding a caf a complementary line of business at one of their bookstores. The initial cost of remodeling a portion of the store to convert it into a cafe, and of buying equipment is expected to be $250,000. This investment is expected to have a life of 5 years, during which period it will be depreciated using straight line depreciation. None of the cost is expected to be recoverable at the end of the five years. The revenues in the first year are expected to be $ 75,000, growing at 10% a year for the next four years. There will be one employee, and the total cost for this employee in year 1 is expected to be $32,000, increasing at 5% a year for the remaining 4 years. The cost of the material (food, drinks ...) needed to run the cafe is expected to be 45% of revenues in each of the 5 years. An inventory amounting to 15% of the revenues has to be maintained; investments in the inventory are made at the beginning of each year. Management expects the installation of the caf should increase the people flow and will impact book revenues in the first year by $ 500,000, growing at 10% per annum for the following 4 years. B&N s operating margin on book sales is, on average, 15%. The tax rate for Barnes & Noble as a business is 21% and the cost of capital for Barnes & Noble is 12.14%. Should we proceed with this innovation?
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