Question
True Fresh Grocery operates a chain of 40 grocery stores. Currently, the company is considering starting a new division, TrueFresh.com, to provide home delivery services.
True Fresh Grocery operates a chain of 40 grocery stores. Currently, the company is considering starting a new division, TrueFresh.com, to provide home delivery services. Customers will be able to order groceries by phone or using the internet, and TrueFresh.com will deliver them within 24 hours at a price guaranteed to be identical to the prices charged in the company's stores.
The company has projected revenue and cost related to this business for the next seven years, as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Revenue $1,700,000(Year 1) $1,870,000(Year 2) $2,057,000(Year 3) $2,262,700(Year 4) $2,488,970(Year 5) $2,737,867(Year 6) $3,011,654(Year 7)
Less expenses:
Cost of merchandise 1,120,000 (Year 1) 1,175,000 (Year 2) 1,200,000 (Year 3) 1,200,000 (Year 4) 1,260,000 (Year 5) 1,300,000 (Year 6) 1,375,000 (Year 7)
Salaries 350,000 (Year 1) 365,000 (Year 2) 380,750(Year 3) 397,000(Year 4) 414,652(Year 5) 432,884(Year 6) 462,030(Year 7)
Depreciation 60,000(Year 1) 60,000(Year 2) 60,000(Year 3) 60,000(Year 4) 60,000(Year 5) 60,000(Year 6) 60,000(Year 7)
Miscellaneous 23,333(Year 1) 21,667(Year 2) 20,917(Year 3) 28,000(Year 4) 27,015(Year 5) 28,783(Year 6) 27,970(Year 7)
Total expense 1,553,333(Year 1) 1,621,667(Year 2) 1,661,667(Year 3) 1,685,000(Year 4) 1,761,667(Year 5) 1,821,667(Year 6) 1,925,000(Year 7)
Income before taxes 146,667(Year 1) 248,333(Year 2) 395,333(Year 3) 577,700(Year 4) 727,303(Year 5) 916,200(Year 6) 1,086,654(Year 7)
Taxes at 20% 29,333(Year 1) 49,667(Year 2) 79,067(Year 3) 115,540(Year 4) 145,461(Year 5) 183,240(Year 6) 217,331(Year 7)
Net income $ 117,334(Year 1) $198,666(Year 2) $316,266(Year 3) $462,160(Year 4) $581,842(Year 5) $732,960(Year 6) $869,323(Year 7)
The business will require an initial investment in delivery trucks and other equipment of $500,000. The trucks and equipment will be depreciated over a seven-year life using straight-line depreciation with a residual value of $80,000.
Required: Assume that True Fresh has decided to limit its analysis to seven years. Calculate the net present value of the new business using a 14 percent required rate of return. Should True Fresh make the investment in the new business?
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