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Jane owns a flower shop. Business has been very good. She has the opportunity to expand her business one of two ways: For $60000 she
Jane owns a flower shop. Business has been very good. She has the opportunity to expand her business one of two ways:
- For $60000 she can open a new store. She will use a 9% loan to finance 100% of this project. She expects to need an additional $10,000 up front to purchase inventory and other working capital items. She will operate the store for 3 years and will sell it for $90,000 at the end of year 3, at which time she will recover her working capital. She expects to make $2,500 in year 1, $2,900 in year 2 and $4,000 in year 3 before selling this new store.
- For $85,000 she can open a web site retail business. She will finance this with a 14% loan. It is a higher rate as it is not secured by real estate. She will not need any additional working capital to start this business. She expects to make 5.000 in year 1, $6,000 in year 2, $7,500 in year 3 and $10,000 for years 4-7. At the end of year 7 she expects to sell his business for $100,000
All amounts presented are after tax/interest payments. Using Excel, prepare a statement showing investment and cash flows by year. Calculate the NPV and IRR for each of these projects. Write a recommendation as to which project she should pursue and support this with information
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