uestion One (25 marks Mrs Brown runs a SOHO business from her home. Her business has expanded, with revenue now reaching $400,000 per year, Mrs Brown is considering moving her business into town centre premises, and employing another assistant, who would cost $60,000 per year She has found premises that could be leased for $35,000 per year payable in advance Mrs Brown currently advertises her business in the local newspapers and business directories, at a cost of $10,000 per year payable in advance. Mrs Brown will carry on with this advertising, but she will also need extensive 'one off advertising to promote the move to the new premises, and the new assistant joining the business. This 'one off advertising in the local newspapers will cost $20,000, which will be paid immediately. In addition to advertising the move in the local newspapers, Mrs Brown could advertise the move on the local radio. The cost of this would be $25,000, also payable immediately Mrs Brown believes that having a town centre presence and the associated publicity in the local newspapers will increase revenue by 40% in the first year and that it would remain at this new increased level. If Mrs Brown also advertised on the local radio, she believes that revenue would increase by 45%, rather than 40%, and would again remain at this new increased level. In view of the increase in revenue, Mrs Brown will be buying equipment & fittings for $38,000 which will be fully depreciated over the period using straight line method. Overheads, excluding advertising, would increase to a total of $40,000 per year. Overheads currently charged to the business are $15,500 per year. Other direct costs such as materials are budgeted at 5% of revenue. Assume that all cash flows arise at the year end, unless otherwise stated. The tax is at 30%. The cost of capital is 12% per annum. Required a) Assuming that both radio and newspaper advertising is used, calculate, over a five-year time period, the net present value of the proposed move to the new premises. On the basis of your calculation, advise Mrs Brown as to whether or not she should move her business into the new premises. Prepare a net present value calculation over a five-year time period, that justifies the additional spend on radio advertising rather than advertising in newspapers alone Using examples from the case to demonstrate the concepts of sunk cost and incremental cost. b) c) d) Explain if the value of the proposed move will be enhanced if the equipment is depreciated over a shorter period (e.g. 2 year)