Diana's Delicious Donuts sells Fresh Hot Glazed Donuts, and Coffee and is contemplating buying a food truck to make and sell its products in large events like county fairs, outdoor concerts, and other similar events. The truck will cost $200,000. Sales Information At a typical event Diana's expects to sell 4,000 Donuts at $2 per piece. Coffee sells at $ 1 and based past on experience they know they sell half as many coffees as they sell donuts at an event. Diana's plans to hit 10 events per year. Sales of donuts, and hence coffee, are expected to go up 7% annually. Item prices must remain same to attract customers in an extremely competitive market. Cost information Today It costs the company: 0 50 cents to produce one donut. 30 cents to produce one cup of coffee. 0 Fuel costs $100 per fair visit. All three costs are expected to increase 5% annually (i.e., 5% higher compared to previous year's number) There are no labor costs as Diana and her family will do all the work. Diana has asked you build a model to recommend if it is worth entering this venture. Food truck businesses usually take a 3-year window to stabilize. So, you need to 1. Construct a model to calculate the profits of Diana's Delicious Donuts for 3 years. 2. Calculate NPV of the profit for the 3-year window at a discount rate of 7.5% 3. 4. Is it worthwhile for Diana's to invest in the buying the food truck today at this numbers? Would this decision change if they were able to do twelve fairs a year instead of 10? Explain your answer.
Diana's Delicious Donuts sells Fresh Hot Glazed Donuts, and Coffee and is contemplating buying a food truck to make and sell its products in large events like county fairs, outdoor concerts, and other similar events. The truck will cost $200,000. Sales Information At a typical event Diana's expects to sell 4,000 Donuts at $2 per piece. Coffee sells at $ 1 and based past on experience they know they sell half as many coffees as they sell donuts at an event. Diana's plans to hit 10 events per year. Sales of donuts, and hence coffee, are expected to go up 7% annually. Item prices must remain same to attract customers in an extremely competitive market. Cost information Today It costs the company: 0 50 cents to produce one donut. 30 cents to produce one cup of coffee. 0 Fuel costs $100 per fair visit. All three costs are expected to increase 5% annually (i.e., 5% higher compared to previous year's number) There are no labor costs as Diana and her family will do all the work. Diana has asked you build a model to recommend if it is worth entering this venture. Food truck businesses usually take a 3-year window to stabilize. So, you need to 1. Construct a model to calculate the profits of Diana's Delicious Donuts for 3 years. 2. Calculate NPV of the profit for the 3-year window at a discount rate of 7.5% 3. 4. Is it worthwhile for Diana's to invest in the buying the food truck today at this numbers? Would this decision change if they were able to do twelve fairs a year instead of 10? Explain your answer.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Diana's Delicious Donuts sells Fresh Hot Glazed Donuts, and Coffee and is contemplating buying a food
truck to make and sell its products in large events like county fairs, outdoor concerts, and other similar
events. The truck will cost $200,000.
Sales Information
At a typical event Diana's expects to sell 4,000 Donuts at $2 per piece.
Coffee sells at $ 1 and based past on experience they know they sell half as many coffees as they
sell donuts at an event.
Diana's plans to hit 10 events per year.
Sales of donuts, and hence coffee, are expected to go up 7% annually.
Item prices must remain same to attract customers in an extremely competitive market.
Cost information
Today It costs the company:
2.
3.
4.
O
50 cents to produce one donut.
30 cents to produce one cup of coffee.
O
Fuel costs $100 per fair visit.
All three costs are expected to increase 5% annually (i.e., 5% higher compared to previous year's
number)
There are no labor costs as Diana and her family will do all the work.
Diana has asked you build a model to recommend if it is worth entering this venture. Food truck
businesses usually take a 3-year window to stabilize. So, you need to
1. Construct a model to calculate the profits of Diana's Delicious Donuts for 3 years.
Calculate NPV of the profit for the 3-year window at a discount rate of 7.5%
Is it worthwhile for Diana's to invest in the buying the food truck today at this numbers?
Would this decision change if they were able to do twelve fairs a year instead of 10? Explain
your answer.
Please take care to set up the model clearly will in terms of inputs, calculations, and outputs. I will
expect you to use references extensively and correctly in your work.
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