A grocery store owner in Vancouver, British Columbia, Mr. Kim has been very successful for over 25 years. Mr. Kim is considering a neglected ice cream store that has been up for sale in Metro Vancouver. Mr. Kim asked for you to review this as a consultant.

Mr. Kim provided you with the following information. A replacement ice cream machine is worth $500,000 with expected life is 5 years. new ice cream machine will rejuvenate the store; however, the store will take time to improve its sales. Sales after first year acquisition is 100,000/year with 10% increase year over year. The ice cream at Earnest is at $5/ ice cream. Ice cream price is expected to rise by 3% per year due to inflation.

In terms of cost variable cost is expected to be 35% of the price, the cost is expected to increase by inflation as noted above. Mr. Kim will require a new employee to run the store. The salary is minimum wage per hour for 40 hours a week, these are also expected to increase by inflation.

Given that the ice cream store will require marketing, digital marketing company has quoted $10,000/ year expected to increase by inflation.

Mr. Kim does not have a return on a similar risk investment and is asking for your advice.

Here is Mr. Kim’s expectation from the consulting contract,

1. Find a discount rate for Mr. Kim based on current interest rates and risk of the project. Explain your findings and rationale for the discount rate.

2. Assess the project/acquisition to calculate NPV, IRR, and Payback Period.

3. Advice Mr. Kim on your analysis.

1. Discount Rate – explain your calculations of for discount rate and rationale. (500 words)

2. Calculation and analysis of NPV, IRR and Payback Period. (500 words)

3. Summarize the above and write your analysis to provide key insights and advice Mr. Kim if you

recommend him to if he should buy the ice cream store or not.

Answer rating: 100% (QA)

Discount Rate To calculate the discount rate for this project we need to consider the risk associated with the project and the current interest rates in the market The risk of the project can be evalu... View the full answer