Alex runs a small farm shop which she set up 2 years ago. She is finding that the shop gets very crowded at times which means that she loses potential customers. She is therefore looking for ways to expand her business. She has come up with two separate options to help her to overcome this problem: Build a small extension to her existing shop OR Invest in new shelving which will allow her to stock the same produce, but more efficiently, freeing up some space She has researched these two options and has worked out the costs that are associated with each. Alex reaches her planned retirement age in 5 years time so plans to sell the business at that point. Assume that all cashflows occur at the end of the year. You can ignore all cashflows that might occur after the end of the 5 year period as Alex plans to retire at this point. Alex uses a discount rate of 15%. £'000 Extension Shelving Now Cash outflow (235.2) (134.4) Year 1 Cash inflow 71.4 42 Year 2 Cash inflow 78.4 56 Year 3 Cash inflow 85.4 61.6 Year 4 Cash inflow 88.2 64.4 Year 5 Cash inflow 95.2 70 Year 5 Extra cash when she sells 154 56 the business Required (a) Calculate the payback period for the two possible options (round your answer to the nearest whole month (b) Calculate the NPV for each of the possible options (c) Interpret your findings, explaining the advantages and disadvantages of the two methods. Make a recommendation for which option Alex should pursue.
Alex runs a small farm shop which she set up 2 years ago. She is finding that the shop gets very crowded at times which means that she loses potential customers. She is therefore looking for ways to expand her business. She has come up with two separate options to help her to overcome this problem: Build a small extension to her existing shop OR Invest in new shelving which will allow her to stock the same produce, but more efficiently, freeing up some space She has researched these two options and has worked out the costs that are associated with each. Alex reaches her planned retirement age in 5 years time so plans to sell the business at that point. Assume that all cashflows occur at the end of the year. You can ignore all cashflows that might occur after the end of the 5 year period as Alex plans to retire at this point. Alex uses a discount rate of 15%. £'000 Extension Shelving Now Cash outflow (235.2) (134.4) Year 1 Cash inflow 71.4 42 Year 2 Cash inflow 78.4 56 Year 3 Cash inflow 85.4 61.6 Year 4 Cash inflow 88.2 64.4 Year 5 Cash inflow 95.2 70 Year 5 Extra cash when she sells 154 56 the business Required (a) Calculate the payback period for the two possible options (round your answer to the nearest whole month (b) Calculate the NPV for each of the possible options (c) Interpret your findings, explaining the advantages and disadvantages of the two methods. Make a recommendation for which option Alex should pursue.
Chapter9: Deductions: Employee And Self-employed-related Expenses
Section: Chapter Questions
Problem 42P
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Transcribed Image Text:Alex runs a small farm shop which she set up 2 years ago. She is
finding that the shop gets very crowded at times which means that she
loses potential customers. She is therefore looking for ways to expand
her business. She has come up with two separate options to help her
to overcome this problem:
Build a small extension to her existing shop OR
Invest in new shelving which will allow her to stock the same
produce, but more efficiently, freeing up some space
She has researched these two options and has worked out the
costs that are associated with each. Alex reaches her planned
retirement age in 5 years time so plans to sell the business at that
point.
Assume that all cashflows occur at the end of the year. You can
ignore all cashflows that might occur after the end of the 5 year
period as Alex plans to retire at this point. Alex uses a discount rate
of 15%.
£'000
Extension
Shelving
Now
Cash outflow
(235.2)
(134.4)
Year 1
Cash inflow
71.4
42
Year 2
Cash inflow
78.4
56
Year 3
Cash inflow
85.4
61.6
Year 4
Cash inflow
88.2
64.4
Year 5
Cash inflow
95.2
70
Year 5
Extra cash
when she sells
154
56
the business
Required
(a) Calculate the payback period for the two possible options
(round your answer to the nearest whole month
(b) Calculate the NPV for each of the possible options
(c) Interpret your findings, explaining the advantages and
disadvantages of the two methods. Make a recommendation for
which option Alex should pursue.
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