Question: The ice cream shop described in the text has been
The ice cream shop described in the text has been a smash success. Customers from the next college town are pleading with you to open one closer to them. Based on your operating experience and knowledge of local real estate, you believe that opening a new ice cream shop will require an investment of $20,000 in fixed assets and $3,000 in working capital. Fixed assets will be straight-line depreciated over five years. Preliminary market research indicates that sales revenue in the first year should be about $50,000 and that variable costs, excluding depreciation, will be about 80% of sales. To be on the safe side, you assume sales revenue will not change over the next five years. At the end of five years, you estimate you can sell your business, after-tax, for $25,000. Using a 28% tax rate and a 12% required return, should you expand?
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