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 400 kEUR, which you finance from equity. After 4 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 120 kEUR, which is expected to grow by 12% every year. The wholesale value of the ingredients as well as overhead is 30% of your sales every year. You need to keep inventory of 30% 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 4 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 19%, and the cost of equity capital is 19%. 1. What is the NPV of the expansion project? 2. Would you recommend your family to undertake the project?

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
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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 400 kEUR, which you finance from equity. After 4 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 120 kEUR, which is expected to grow by 12% every year. The wholesale value of the ingredients as well as overhead is 30% of your sales every year. You need to keep inventory of 30% 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 4 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 19%, and the cost of equity capital is 19%. 1. What is the NPV of the expansion project? 2. Would you recommend your family to undertake the project?
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 400 KEUR,
which you finance from equity. After 4 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 120 KEUR, which is expected to grow by 12% every year. The wholesale value of the
ingredients as well as overhead is 30% of your sales every year. You need to keep inventory of 30% 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 4 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 19%, and the cost of equity capital is
19%.
1. What is the NPV of the expansion project?
→
2. Would you recommend your family to undertake the project?
◆
Transcribed Image Text: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 400 KEUR, which you finance from equity. After 4 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 120 KEUR, which is expected to grow by 12% every year. The wholesale value of the ingredients as well as overhead is 30% of your sales every year. You need to keep inventory of 30% 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 4 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 19%, and the cost of equity capital is 19%. 1. What is the NPV of the expansion project? → 2. Would you recommend your family to undertake the project? ◆
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