You decide to start your own business.You decide that you want to start a coffee shop.And want to determine if it is a good economic decision.

For the sake of this example speculate on the following numbers:

Cost of shop = Initial Cash Flow = $XXXXXX(Maybe consider a value between $30,000 and $100,000).

Net Operating Cash Flow per year = $XXXX (Perhaps consider a number between 7,500 and $25,000 per year - this number is net of all costs except the cost of your initial investment).

Terminal Cash Flow =$XXXX (Consider a number between $20,000 and $80,000).

Speculate or "make up" numbers for the above three categories.What numbers did you make up and briefly comment on them.

Using the values assumed and an assumption that you will receive Net Operating Cash Flows for Five years; will sell the business at the end of five years and have a cost of capital (discount rate, interest rate, WACC) associated with the project equal to 12%, answer the following questions.

What cash flows do you receive (cash inflows) and what cash flows do you pay (cash outflows)?

Part 2

How many years will it take to recover your initial investment in the coffee shop given the data above (i.e. how long in years will it take to earn back the Initial Cash Flow that you spent)?

Would you accept or reject the idea of the coffee shop based on this analysis, why?

Part 3

(i) What is the present value of the revenue if you discount the five operating cash flow payments by 12%?

(ii) What is the present value of the sale price you expect to receive at the end of year 5?

Add up the PV of the operating cash flow payment stream and the sale price.(Add up your answer from parts (i) and (ii) from above).

(iii) How does the Present Value of Inflows (PVI) compare to the cost of the project (Present Value of Outflows)?

(iv) If you subtract the PVIs from the PVOs how much net value is created by making the investment?

(v) Would you accept or reject this project based on this analysis, why?

Part 4

Compute the rate of return (CPT i/y) earned based on the Initial investment (-Initial Investment PV) and the receipt of payments of operating cash flow (operating cash flowpmt) each year (5 n) and an additional payment at the end of the project of $sale price (sale price FV) ?

Would you accept or reject this project based on this analysis, why?