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 7 years,
as follows:

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 7 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?

Transcribed Image Text:

Year 2 Year 3 Year 4 Year 6 Year 1 Year 7 Year 5 $3,011,654 $1,700,000 $1,870,000 $2,057,000 $2,262,700 $2,488,970 $2,737,867 Revenue Less expenses: 1,175,000 365,000 60,000 21,667 1,621,667 Cost of merchandise 1,120,000 350,000 60,000 23,333 1,553,333 1,200,000 380,750 60,000 20,917 1,661,667 1,200,000 397,000 1,300,000 432,884 1,375,000 462,030 60,000 27,970 1,925,000 1,260,000 414,652 60,000 27,015 1,761,667 Salaries 60,000 28,783 1,821,667 Depreciation Miscellaneous Total expense Income before taxes Taxes at 40% Net income 60,000 1,685,000 577,700 231,080 248,333 99,333 395,333 158,133 727,303 290,921 1,086,654 434,662 146,667 916,200 366,480 58,667 $ 88,000 $ 237,200 $ 346,620 $ 436,382 $ 549,720 $ 651,992 $ 149,000