EXTENSION PROJECT

Assume that Online book store is considering adding a cafe to its bookstore. The cafe, it is hoped, will make the bookstore a more attractive destination for would-be shoppers. The following information relates to the proposed cafe:

The initial cost of re-modelling a portion of the store to make it a cafe is expected to be $150,000. This investment is expected to have a life of five 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 from the cafe in the first year are expected to be $60,000, growing at 10% a year for the next four years.

There will be one employee, and the total cost for this employee in the first year is expected to be $30,000, growing at 5% a year for the next four years.

The cost of the material (food, drinks, etc.) needed to run the cafe is expected to be 40% of

revenues in each of the five years.

An inventory amounting to 5% of the revenues has to be maintained; investments in the inventory are made at the beginning of each year.

The tax rate as a business is 40%.

Find NPV of Extension project.