Question
Suppose you own a bakery that generates $580,000 in after-tax operating income and has revenues of $5 million. You are considering starting a delivery service
Suppose you own a bakery that generates $580,000 in after-tax operating income and has revenues of $5 million. You are considering starting a delivery service that will send baked goods to customers' homes. You estimate that the delivery service will generate an additional $2 million in revenues. You've come up with the following additional information:
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Your existing equipment needs updating, which will cost you $650,000. You can depreciate this investment (straight line over 5 years to salvage value of $250,000). You do not need to pay a capital gains tax.
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You must hire additional staff, which adds $400,000 to your costs (salary and related costs).
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You must advertise more, your advertising cost will increase from $40,000 to $90,000 if the project is pursued.
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Your current inventory of $100,000 is not enough; it must increase to $150,000. This increase in inventory will be recovered at the end of the project.
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Cost of baked goods will be 70% of revenues.
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The shipping service will last for 5 years
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The marginal tax rate is 30%.
Using Excel, find the yearly after-tax cash flows from this investment. If your cost of capital is 8%, estimate the net present value of this investment. What is the IRR of this project? Assume that 20% of the revenues from the shipping service end up going to loyal customers who would have otherwise come to the bakery? (You assume that the customers would have spent the same time in the bakery). What is your new NPV?
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