The initial investment in distribution autos, technology equipment, packaging for deliveries and other fixed assets is approximately $70,000. These assets will be depreciated over a 5-year period, using straight-line depreciation.

At the end of this project, the distribution fleet and technology equipment can be sold for $6,000.

The firm already has the necessary warehouse capacity needed for this service. The service will occupy 10% of the warehouse. The warehouse is rented at an annual cost of $30,000.

The wages for the project workers will be $15,000 per year; 20% of them are workers transferred from other WOTM businesses (the company has a lifetime job policy). The distribution costs (fuel, etc.) are 1% of sales of the new service.

In the first year, WOTM expects to sell 10% of the current quantity sold in the supermarkets. For the following years, this percentage will increase to 30%.

However, as a consequence of the introduction of the new service, it is expected that sales of the supermarket businesses will go down. Sales in the traditional supermarket business are expected to decrease from 1.5 million a year to 1.4 million a year for the next five years.

This is a premium service. Therefore, the sales of the home delivery goods will be 5% higher than the current supermarket sales. The cost of goods sold represents 80% of the supermarket sales.

WOTM expects to spend $10,000 now in advertising and $20,000 during the first year of the project.

Accounts are payable in 15 days and inventory corresponds to one month sales. Accounts are receivable in 30 days for home delivery and cash payment for supermarket clients.

WOTM has a 40% tax rate, a 10% cost of capital and profits of $100,000 in its current business.

Questions:

1. Calculate the NPV and IRR for the new delivery service.
2. Calculate the Profitability Index for the new service.
3. What would the NPV and IRR be for a 10% change (plus or minus) in sales of the new service instead of the projected 5% increase.