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Question 1 Bart Simpson, an entrepreneur planning to embark on an E-Business venture, running internet auctions. An initial market survey has been carried out
Question 1 Bart Simpson, an entrepreneur planning to embark on an E-Business venture, running internet auctions. An initial market survey has been carried out at a cost of 40,000 to establish the likelihood of success. The expected costs and revenues relating to the project are as follows. Annual revenues 200,000 250,000 300,000 Probability 0.3 0.4 0.3 Costs: . ii. iii. iv. V. vi. Initial set-up costs (web authoring, Advertising etc.) 120,000. There will be spending of working capital of 35,000 at the start of the project. This will be recovered at the end of year 5. Annual running costs (wages/electricity) are expected to be 90,000 in year 1, and expected to increase by 5% per year due to inflation. Other fixed overheads (rent/insurance etc.) will be 116,000 per year. In addition to the revenue, Bart also expects to have some advertising income from the site. This is expected to be 20,000 in the first year, rising by 20% each and every year thereafter. A major upgrade to the server will need to be made in year 3 at a cost of 68,000. The cost of capital to the company is 9% and the project is expected to last for 5 years. Required: Using the Net Present Value method of investment appraisal, identify whether the new proposal should be accepted or rejected. Briefly discuss what other factors would need to be taken into account before embarking on such a project. (40 marks)
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