PLC which started in 2010 was founded by the chairman Mr Pep. The

corporation operates a wholesale service for independent retailers, caterers and

FoodPlanet PLC which started in 2010 was founded by the chairman Mr Pep. The

corporation operates a wholesale service for independent retailers, caterers and businesses and are committed to providing a better service to all of their customers.

However, due to an increasing consumer demand for everything from online grocery

shopping to more personalized advertising, the rise of technology in the grocery

industry is reaching a fever pitch. The sales have plummeted due to external

competition. The company does not have an online platform and is struggling to

cope with the demand of online shopping. Their sales have dropped as less people

venture into the shops to buy food. To encourage sales and growth, the company

have provided more discounts and offers to customers. Nevertheless, the fall in the

company has affected the profitability margins and has had a serious effect on their

borrowing capacity and ability to pay back the interest on their debts and decrease in

cash flow.

In order to enhance competition and start up the online branch, Mr Pep considers

raising finance to expand the online retailing stores and buy products. Given that the

firm's financial positions and the risk

entering into new internet market, this has not

been without risks both short term and long-term growth as the running online e-

retail store will affect financial structure and probability.

Initially, the cash flow coming into the online branch is expected high as customers

were intrigued over the range of goods and wholesale prices. There was a high

volume of sales and therefore the companies had more liquid assets (cash) then

initially anticipated.

After discussing the business online experts in the type of retail grocery business

they anticipate that after costs the cash flow coming into the online store will

increase the sale by 550,000 a year. The immediate cost necessary to establish the

online processing software will cost 4,000 and it can have a useful life of five years.

The internet company charges 6,000 for installing a new online network (line) and

1,600 a year for the line. The online delivery is needed a fleet of new delivery vans

and the vans cost 250,000. The vans can be financed for 5 years with a 40% down

payment. The bank will offer finance for the vans through a loan at 5% compounded

monthly with monthly payment of 2,830.69. The company will need to recruit for

part time van delivery drivers to carry out the delivery of catering products and it

costs 5,000 a year. The vans have a useful life of five years and it depreciates

straight line for five year. It assumes that the salvage value on the new vans is equal

to 25% of the total cost of vans and that the straight line depreciation method is

appropriate to estimate the depreciation expense per year. The annual depreciation

expense

in the company's income statement

is calculated at 20% of annual

depreciation. It should be noted that the company has a 20% tax rate for its profits.

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The van maintenance expense and insurance will cost 3,000 a year. The weighted

average cost of capital is calculated at 8%. FoodPlanet has assumed a decrease in

sales from the physical grocery shopping if this plan goes ahead due to customers

moving from physical groceries to electronic ones. Further, the financial advisor

reckons the decrease in sales will amount to 430,000 a year.

The financial advisor believes there will be no significant inflation over the next five

years and therefore have not included inflation in the above figures. FoodPlanet has

some debt and its shares are not quoted on the stock market. If the proposal was to

go ahead then the company would need to raise additional finance. The financial

advisor has not recommended which way to go with regards to the choice of

financing.

Q1: a schedule of cash flows for the project. Calculate, using the

information available, the Net Present Value of the proposal to sell online

shopping and run online store. Include in your answer a justification for

whether or not you recommend FoodPlanet to go ahead with this proposal.

In this question you are required to critically discuss the effect of the cost of

capital on financial decisions.

Q2: Calculate the payback period for the proposed project to run online store,

if the company has a policy of only accepting projects with payback of less

than three years, would this be accepted? Comment on the suitability of the

payback method for the new investment and comment how to develop an

appropriate payback year for the new project