Yoko is considering opening a new food trailer that will sell Okonomiyaki. She just returned from Japan, where she enrolled in culinary school at a total (tax-deductible) cost of $25,000. She has found a used trailer that will cost $25,000. The truck will be depreciated, straight-line, to zero over a five-year period, with the first deduction in year one. In addition to the cost of the truck, Yoko expects to spend (immediately) $4,000 to decorate the truck, $1,500 on the register and credit-card system, $2,000 on website design, and $12,000 in additional start-up costs – all of which will be expensed for tax purposes. She expects annual sales to be $200,000 in the first year and then to grow at an annual growth rate of 20%. In five years (i.e., after generating sales for five years), she expects to sell the truck and concept for $50,000. She expects the costs of goods sold (COGS) to equal 60% of sales. She will also have to lease the parking space for $10,000 per year. She plans to work at the truck herself, so she will have no labor expenses (although she’ll have to give up her current job, where she earns $60,000 per year). She expects cash to be 1% of sales, inventory to be 1% of COGS, accounts receivable to be 5% of sales, and accounts payable to be 10% of COGS. You can assume that the net working capital investment starts one year from today (at the same time as the first year’s sales and COGS). Assume that Yoko’s marginal tax rate is 25%.

a). Compute the NPV and the IRR of the project. Use a discount rate of 10%.

b). There is significant uncertainty in the percentage of COGS. In the base case described above the COGS amount to 60% of revenues. What is the breakeven percentage of COGS relative to sales?