Market Street caf is planning to introduce fresh juices on its menu to cater to customers...

 

Transcribed Image Text:

Market Street café is planning to introduce fresh juices on its menu to cater to customers looking for an alternative to their coffee, especially during summers. However, the new addition will need an investment of $10,000 as the café will need to make some alterations to the existing setup, purchase equipment and increase its working capital. From his experience, Phil, the café owner, knows that over time other cafes will imitate his idea, and any additional profits he makes in the initial years of the addition will gradually fade. Nevertheless, Phil expects to make extra profits of $7,000 in year 1, $3,000 in years 2 and 3, $2,500 in year 4, and $1,000 in year 5. i) Using a discount rate of 17 percent, calculate the NPV of the Project. Is the project a good investment opportunity for Market Street Café? (5 Marks) Phil's wife, who is also actively engaged in the café business, has suggested an alternative to the juice project She proposes to start offering organic ice-creams at their café, as she believes it will entail smaller initial and operational investments. She expects to spend $5,000 on the installation of a display refrigerator and an additional $1000 on inventory. She forecasts additional profits for the next five years to be $4000 for years 1 and 2, $2000 for years 3 and 4, and $1000 for year 5. Based on her assessment, she argues with Phil that organic ice cream is a better project than the juice bar installation, as the payback period is shorter. ii) Calculate the payback period for the two projects (Juice bar and Organic ice cream). Write a brief note advising Phil and his wife explaining the limitations of the payback period in the assessment of investments. Market Street café is planning to introduce fresh juices on its menu to cater to customers looking for an alternative to their coffee, especially during summers. However, the new addition will need an investment of $10,000 as the café will need to make some alterations to the existing setup, purchase equipment and increase its working capital. From his experience, Phil, the café owner, knows that over time other cafes will imitate his idea, and any additional profits he makes in the initial years of the addition will gradually fade. Nevertheless, Phil expects to make extra profits of $7,000 in year 1, $3,000 in years 2 and 3, $2,500 in year 4, and $1,000 in year 5. i) Using a discount rate of 17 percent, calculate the NPV of the Project. Is the project a good investment opportunity for Market Street Café? (5 Marks) Phil's wife, who is also actively engaged in the café business, has suggested an alternative to the juice project She proposes to start offering organic ice-creams at their café, as she believes it will entail smaller initial and operational investments. She expects to spend $5,000 on the installation of a display refrigerator and an additional $1000 on inventory. She forecasts additional profits for the next five years to be $4000 for years 1 and 2, $2000 for years 3 and 4, and $1000 for year 5. Based on her assessment, she argues with Phil that organic ice cream is a better project than the juice bar installation, as the payback period is shorter. ii) Calculate the payback period for the two projects (Juice bar and Organic ice cream). Write a brief note advising Phil and his wife explaining the limitations of the payback period in the assessment of investments.

Answer rating: 100% (QA)

i NPV of the juice project Year 0 Investment 10000 Year 1 Cash flow 7000 Present value 70001171 5980 ... View the full answer