2) Your firm (a shampoo maker) has decided to enter a new industry: Doughnuts. Bubbles Doughnuts will compete with Dunkin Donuts and Krispy Kreme. You will try to exploit your current customer base, women who like to pamper themselves and secretly eat a lot of doughnuts. There will be 25 locations. The combined land and construction cost for all 25 sites will be $20million. Construction will be completed in one year. The land is approximately one quarter of the cost and cannot be depreciated. The remaining fixed costs will be depreciated 20 year, straight line. After twenty years of operation, you will exit the business. You anticipate the doughnut shops to have no salvage value but the land can be sold for $7m (net, so after all relevant taxes have been paid).
2) Your firm (a shampoo maker) has decided to enter a new industry: Doughnuts. Bubbles Doughnuts will compete with Dunkin Donuts and Krispy Kreme. You will try to exploit your current customer base, women who like to pamper themselves and secretly eat a lot of doughnuts. There will be 25 locations. The combined land and construction cost for all 25 sites will be $20million. Construction will be completed in one year. The land is approximately one quarter of the cost and cannot be depreciated. The remaining fixed costs will be depreciated 20 year, straight line. After twenty years of operation, you will exit the business. You anticipate the doughnut shops to have no salvage value but the land can be sold for $7m (net, so after all relevant taxes have been paid).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Finance
Transcribed Image Text:2) Your firm (a shampoo maker) has decided to enter a new industry: Doughnuts. Bubbles
Doughnuts will compete with Dunkin Donuts and Krispy Kreme. You will try to exploit your
current customer base, women who like to pamper themselves and secretly eat a lot of
doughnuts.
There will be 25 locations. The combined land and construction cost for all 25 sites will be
$20million. Construction will be completed in one year. The land is approximately one quarter
of the cost and cannot be depreciated. The remaining fixed costs will be depreciated 20 year,
straight line. After twenty years of operation, you will exit the business. You anticipate the
doughnut shops to have no salvage value but the land can be sold for $7m (net, so after all
relevant taxes have been paid).
When you open for business after construction is complete, each shop is expected to average
sales of $2m/yr. and have operating costs of $1.8m/yr. over its twenty-year life (both of these are
end of year figures). The entire operation will require $1m in working capital upon the
completion of construction and an additional $0.1m in each of the first five years of operation.
That working capital will be recouped in equal increments in the final two years of operation as
inventories are eliminated.
Your firm's CEO's worthless brother-in-law, who has a longstanding, lifetime contract with the
company for $500,000/yr., has been assigned as the head of operations at the corporate office.
He has hired new staff to do the actual work at corporate headquarters at a cost of $250,000/yr.
beginning in the first year of operations. There are no other new corporate expenses.
You firm's WACC is 10%. A freestanding doughnut chain with a Debt/Equity = 4 (the same as
your firm) has a cost of debt equal to 9% and a cost of equity equal to 16%. The corporate tax
rate for both companies is 33%.
What is this project's NPV?
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