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PORBLEM QUESTION (35 mins) 2. After an adventurous life of being a famous wizard and defeating Voldemort, Harry opened up a broomstick store at Diagan Alley. He has always sold a range of different models of broomsticks but has never considered selling the Firebolt (a premium broomstick model) until recently. In the last few months, Harry's wife Ginny spent an estimated $350,000 in research to determine the following: The Firebolt is expected to generate $800,000 sales next year and then an additional 4% p.a. for the ensuing four years. After that, demand for the Firebolt will effectively die out as the Firebolt Supreme will be released. Additional operating expenses for selling the Firebolt will be 60% of its revenues each year . Selling the Firebolt will also require an additional $10,000 working capital immediately .Harry's store owns a warehouse near Diagon Alley which he can use to store his inventory of Firebolt broomsticks. The warehouse is currently rented out to his mate Ron at an annual rent of $150,000 . If he starts selling the Firebolt, it is expected that the store's existing demand of several of its other broomstick models will decrease. The estimated effect is that on aggregate, the store's revenue will be decreased by $50,000 every year while the Eirebolt is sold .The exclusive producer of the Firebolt is a company called Ltd, which is located a significant distance away from Harry's store and does not deliver to its retailers. As such, Harry will need to immediately purchase a truck. A suitable truck in the market currently costs $475,000 which is depreciable on a straight line basis over the next five years with a residual value of $100,000 for tax purposes. The truck can be sold in five years' time for $150,000 To finance the truck purchase, Harry has two choices: he could issue a 5 year bond with a semi- annual coupon rate of 4% OR he could issue a 10 year bond with an annual coupon rate of 7%. The Ministry currently charges a company tax rate of 30% for stores in Diagon Alley . . Given that Harry's cost of capital is 15%, should Harry start selling Firebalts in his store