A business opportunity has presented itself to you and one of your classmates. Your opportunity is to enter the fast growing craft beer industry. Your projected sales in the first year is 7500 kegs. Your projected growth rate is 8 percent. Entering the business will require $35,000 of net working capital. Total fixed costs are $95,000. Variable production costs are $30 per keg and keg sales are priced at $55 each. The equipment to begin production is $175,000. The equipment will be depreciated using straight line depreciation over a five year life and has no salvage value. The tax rate is 34 percent and the required return is 30 percent. What is the NPV of the project and should you pursue the project?
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- You are entering the widget business. It costs$500,000, payable in year 1, to develop a prototype.This cost can be depreciated on a straight-line basisduring years 1–5. Each widget sells for $40 and incursa variable cost of $20. During year 1, the market sizeis 100,000, and the market is growing at 10% peryear. You believe you will attain a 30% market share.Profits are taxed at 40%, but there are no taxes onnegative profits.a. Given your other assumptions, what market share isneeded to ensure a total free cash flow (FCF) of $0over years 1 to 5? (Note: FCF during a year equalsafter-tax profits plus depreciation minus fixedcosts, if any.)b. Explain how an increase in market share changesprofit.c. Explain how an increase in market size growthchanges profit.d. Use Excel’s auditing tool to show how the marketgrowth assumption influences your spreadsheet.Assume you want to start your own small business. You like to open a bakery or nail salon. We assume that the set up cost is the same for both of them and you should invest 1000$. In terms of profit: if you open a bakery for the first year there is 35% chance that you earn 30% and 65% chance that you earn 15%. For the second year, there is 45% chance that you earn 50% and there is 55% chance that you earn 20%. If you open a nail salon, for the first year there is 25% chance that you 60% and 75% chance that you earn 40%. For the second year, there is 80% chance that you earn 30% and 20% chance that you earn 60%. Which business is a better investment that gives you the higher profit for your investment?Calico Restaurants is planning to create a new online meals-to-order service and has estimated that creating it will have the following effects on its operations: a. Annual revenues will increase from $800,000/year to $1,300,000/year, for the next 3 years. b. While the restaurant earns an EBITDA margin (EBITDA as percent of sales) of 30% currently, it expects to earn an EBITDA margin of 40% on just its incremental online sales. c. The tax rate is 20% and the appropriate cost of capital for online restaurant businesses is 12%. Assuming that there will be an initial cost of $450,000 for creating the service, which will be depreciated straight line over 3 years to a salvage value of zero, estimate the NPV for the investment. a. 112,365 b. 9,865 C. -2,354 d. 6,348
- Assume that you are thinking about starting your own small business. You have made the following estimates regarding this opportunity: You can rent a location for your business at a cost of $36, 000 per year. The equipment costs incurred to start the business would total $250,000. The equipment would have a 5-year useful life and a salvage value of S 25,000. Your company's estimated sales per year would equal $350,000 and its variable cost of goods sold would be 30% of sales. Other operating costs would include $56, 000 per year in salaries, S4, 000 per year for insurance, $25, 000 per year for utilities, and a 3% sales commission. The payback period for this investment opportunity is closest to: Multiple Choice 4.08 years, 2.20 years. 3.80 years. 3.08 years.You just entered grade 1 and you decide to open a lemonade stand that requires a one-time, up-front investment of $1,200 at the start of the project (which will be today). In the first year you expect to earn $100 in revenues from lemonade sales, and you expect sales to increase by $200 per year thereafter (so $300 in the second year of operations, etc.) Your costs are lemons. Lemons will cost you $300 per year each year. The project will last for 12 years until you graduate high school. At the end of the project, you can sell your industrial lemon squeezer for $400. Find the AEW of the lemonade stand over the 12-year period, evaluated at the current interest rate of 8%. The solution is within $20 of which of the following? O 502 O542 582 622 None of the aboveAssume that you are thinking about starting your own small business. You have made the following estimates regarding this opportunity: • You can rent a location for your business at a cost of $36,000 per year. The equipment costs incurred to start the business would total $250,000. The equipment would have a 5-year useful life and a salvage value of $25,000 Your company's estimated sales per year would equal $350,000 and its variable cost of goods sold would be 30% of sales. • Other operating costs would include $58,000 per year in salaries, $4,000 per year for insurance, $25,000 per year for utilities, and a 3% sales commission The simple rate of return for this investment opportunity is closest to: Multiple Choice 22.0% 19.0% 26.6% 15.7%
- An office building is currently for sale, and you are thinking of purchasing it. From your extensive market research and knowledge, you know the net operating income for this year is $315,000. You expect the net operating income will grow by 7% in the first five years, 5% in the subsequent five years, and 3.5% for every year after. If you are considering an 18-year investment window and desire a 16% rate of return, how much should you pay for the building?The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $155,000 the manager can conduct a focus group that will increase the product’s chance of success to 65 percent. Alternatively, the manager has the option to pay a consulting firm $345,000 to research the market and refine the product. The consulting firm successfully launches new products 80 percent of the time. If the firm successfully launches the product, the payoff will be $1.9 million. If the product is a failure, the NPV is zero. Calculate the NPV for each option available for the project. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars.) Which action should the firm undertake? multiple choice Go to market now Consulting firm Focus groupMike made $10,000 investment in an endorser whereby he manufactures products that are easily sold at $50 per unit. Per computation, the payback period is 2 years. If the total cost incurred by the company during a year is $21,000 a) What is the no. of products that the company was able to sell during the year? b) If his target is to attain a 15% Rate of Return, do you think he has achieved his goal? Why?
- You are opening a new winery. For your business plan, your banker and investors have asked for information on branding and costing of your product. Your plan is to produce 500 cases a year of sparkling wine, because you have just acquired a new vineyard producing cool-climate Pinot Noir. To prepare for the meeting, prepare the answer to the following questions. 1. Your vineyard cost $800,000 CDN and is planted to 8 acres of Pinot Noir capable of producing a baseline average of 2.2 tonnes of fruit per acre. You have a mortgage of $800,000 (wow, your bankers really trust you!) at 3% APR on a 30-year term beginning January 1, 2021. You can rent a custom crush facility (cellar, press, tanks, and a co-op tasting room) for $7500 a year, and at this time you don’t have the money to consider purchasing your own facility and equipment ($1M). What are your monthly fixed costs for vineyard and facilities? 2. Your vineyard has drip irrigation, and you will need to decide whether to use it or not.…B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $875,000. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $16.5 million. If unsuccessful, the present value payoff is $7.5 million. The appropriate discount rate is 13 percent. Calculate the NPV for the firm if it conducts customer segment research and if it goes to market immediately. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Should the firm conduct customer segment research or go to the market immediately? multiple choice…You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $50,000 for rent, and $30,000 for equipment. There is a one-half probability that revenues will be $210,000 and a one-half probability that revenues will be $400,000. Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers. Enter a loss as a negative number. a. In the low-revenue situation, what will your accounting profit or loss be? $ What will your accounting profit or loss be in the high-revenue situation? $ b. On average, how much do you expect your revenue to be? $ Your accounting profit? $ Your economic profit? $…