ou manage an ice cream business and want to buy a new store from which to operate. The sales price of the new building is 800 kEUR, which you finance from equity. After 3 years you sell the building for its original purchase price. Accounting rules do not allow you to depreciate real estate. Projected sales from the new building for the first year are 480 kEUR, which is expected to grow by 5% every year. The wholesale value of the ingredients as well as overhead is 40% of your sales every year. You need to keep inventory of 10% of sales in order to ensure smooth operation of the store. Inventory needs to be available at the beginning of each fiscal year. At the end of the project, after 3 years, the inventory (fresh milk and such) is worth nothing, and the firm is not going to buy inventory for the time after it has sold the building. Your customers pay cash, and you also pay cash for the ingredients on the wholesale market. Corporate tax is 20%, and the cost of equity capital is 13%. 1. What is the NPV of the expansion project? 2. Would you recommend your family to undertake the project?
ou manage an ice cream business and want to buy a new store from which to operate. The sales price of the new building is 800 kEUR, which you finance from equity. After 3 years you sell the building for its original purchase price. Accounting rules do not allow you to depreciate real estate. Projected sales from the new building for the first year are 480 kEUR, which is expected to grow by 5% every year. The wholesale value of the ingredients as well as overhead is 40% of your sales every year. You need to keep inventory of 10% of sales in order to ensure smooth operation of the store. Inventory needs to be available at the beginning of each fiscal year. At the end of the project, after 3 years, the inventory (fresh milk and such) is worth nothing, and the firm is not going to buy inventory for the time after it has sold the building. Your customers pay cash, and you also pay cash for the ingredients on the wholesale market. Corporate tax is 20%, and the cost of equity capital is 13%. 1. What is the NPV of the expansion project? 2. Would you recommend your family to undertake the project?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
You manage an ice cream business and want to buy a new store from which to operate.
The sales price of the new building is 800 kEUR, which you finance from equity. After 3
years you sell the building for its original purchase price. Accounting rules do not allow
you to depreciate real estate.
Projected sales from the new building for the first year are 480 kEUR, which is expected to
grow by 5% every year. The wholesale value of the ingredients as well as overhead is 40%
of your sales every year. You need to keep inventory of 10% of sales in order to ensure
smooth operation of the store. Inventory needs to be available at the beginning of each
fiscal year. At the end of the project, after 3 years, the inventory (fresh milk and such) is
worth nothing, and the firm is not going to buy inventory for the time after it has sold the
building. Your customers pay cash, and you also pay cash for the ingredients on the
wholesale market. Corporate tax is 20%, and the cost of equity capital is 13%.
1. What is the NPV of the expansion project?
2. Would you recommend your family to undertake the project?
Transcribed Image Text:(Question Id: statements_4pt@statements20_4pt#64002)
You manage an ice cream business and want to buy a new store from which to operate.
The sales price of the new building is 800 KEUR, which you finance from equity. After 3
years you sell the building for its original purchase price. Accounting rules do not allow
you to depreciate real estate.
Projected sales from the new building for the first year are 480 KEUR, which is expected to
grow by 5% every year. The wholesale value of the ingredients as well as overhead is 40%
of your sales every year. You need to keep inventory of 10% of sales in order to ensure
smooth operation of the store. Inventory needs to be available at the beginning of each
fiscal year. At the end of the project, after 3 years, the inventory (fresh milk and such) is
worth nothing, and the firm is not going to buy inventory for the time after it has sold the
building. Your customers pay cash, and you also pay cash for the ingredients on the
wholesale market. Corporate tax is 20%, and the cost of equity capital is 13%.
1. What is the NPV of the expansion project? 242
2. Would you recommend your family to undertake the project? FALSE
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