John is considering opening a hotdog stand on Michigan Avenue. Johns market research shows that the clientele is young professionals, typically without children, who like the traditional aspect of eating hotdogs, but also relish his gourmet, specially manufactured low-fat hotdogs and the healthy side dishes his stand also sells. John's overall plan is to get the stand up and running for five years, and then sell the stand off to a new owner and retire to Florida.

1. John estimates that the cost of starting up a stand will be as follows: Purchase of retail kiosk (mobile retail food outlet) $500,000

Specialized kitchen equipment $50,000

Installation of the kitchen equipment $10,000

Furniture and fittings $50,000

2. John estimates that annual operating costs for his stand as follows:

Kitchen and service staff (5 people)- total of $200,000 per year

License and rent costs $150,000.

Raw materials:

-Hotdogs- $2 per hotdog. Raw material price per burger goes up by 10% every year.

-Drinks- $38,400 -Other food supplies- $58,900 -Nonfood supplies- $50,200

3. The revenues at his current location are as follows:

Sales value- $5 per hotdog. Sale price for hotdogs increase every year by 50%.

Average daily sales- #300 hotdogs. The sales increase every year by 20% in quantity.

Drinks- $100,000.

Other food sales- $155,000

4. Other information:

Marginal tax rate is 35%

Cost of Capital is 10%

Cost of the stand (kiosk), together with the cost of the equipment, furniture and fittings and

the installation, is depreciated over five years according to the straight-line method. The stand (together with the furniture and kitchen equipment) is expected to be worth $300,000

after five years of service.

Note: The definition of an asset's cost is all costs that are necessary to get an asset in place and ready for use.

1. Construct a model in Excel to evaluate the project. (Input values in sheet 1)

2. What is the NPV of this investment?

3. Consider several values of cost of capital from 7% to 13%. Looking at the chart, insert your observations and conclusion on page 2.