Baak Tirebolu, the CEO of ay Inc., is reading a marketing report on a potential new...
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Baak Tirebolu, the CEO of ay Inc., is reading a marketing report on a potential new site to open a new shop for their successful chain tea-shop named 'ayc'. The marketing test run indicated a great demand for tea in the area that is estimated to generate revenue of 1,000,000 TL per year. Ms. Tirebolu decides to ignore any potential growth in sales that may come with time and plans for 1,000,000 TL of constant revenue. If Ms. Tirebolu decides to open up a shop in the new area, she will sign a rental agreement for 3 years. Hence, she will evaluate the viability of the project with a 3-year horizon in mind. The costs associated with operating a tea shop consists of variable and fixed costs. Ms. Tirebolu estimates variable costs to be 15 percent of sales every year. Fixed costs are expected to be 350,000 TL per year. Sales in a tea-shop are mostly in cash, hence Ms. Tirebolu expects no credit sales. However, the shop needs to hold inventory to ensure smooth sales. Inventory is expected to be 15% of sales. Ms. Tirebolu has excellent relations with her suppliers. As a result, accounts payable (due to credit offered from suppliers) is expected to be 5% of sales. Marketing forecasts show that opening and decorating the new shop and purchasing the necessary machinery would cost 600,000 TL upfront. The 600,000 TL worth of machinery and equipment could be depreciated for tax purposes straight-line over three years. Furthermore, after the rental agreement is over, the machinery could still be used in another shop. The salvage value of the machinery is expected to be 100.000. ay Inc. is a family-owned business. The corporate tax rate is 20 percent. Ms. ay based upon her experiences in the tea business knows that investors require a minimum rate of return of 30 percent to invest in new ventures. 1) Based on the information provided in the short synopsis, should Ms. Tirebolu consider opening the new shop? Show all your analysis. 2) Please clearly list and discuss all assumptions you made in the analysis. Identify the most important problem areas or assumptions in the analysis that might change the results. 3) Based on your analysis, what is the break-even revenue in year 1. (Hint: You can calculate break-even revenue by setting net income to 0 and solving for the revenue.) Baak Tirebolu, the CEO of ay Inc., is reading a marketing report on a potential new site to open a new shop for their successful chain tea-shop named 'ayc'. The marketing test run indicated a great demand for tea in the area that is estimated to generate revenue of 1,000,000 TL per year. Ms. Tirebolu decides to ignore any potential growth in sales that may come with time and plans for 1,000,000 TL of constant revenue. If Ms. Tirebolu decides to open up a shop in the new area, she will sign a rental agreement for 3 years. Hence, she will evaluate the viability of the project with a 3-year horizon in mind. The costs associated with operating a tea shop consists of variable and fixed costs. Ms. Tirebolu estimates variable costs to be 15 percent of sales every year. Fixed costs are expected to be 350,000 TL per year. Sales in a tea-shop are mostly in cash, hence Ms. Tirebolu expects no credit sales. However, the shop needs to hold inventory to ensure smooth sales. Inventory is expected to be 15% of sales. Ms. Tirebolu has excellent relations with her suppliers. As a result, accounts payable (due to credit offered from suppliers) is expected to be 5% of sales. Marketing forecasts show that opening and decorating the new shop and purchasing the necessary machinery would cost 600,000 TL upfront. The 600,000 TL worth of machinery and equipment could be depreciated for tax purposes straight-line over three years. Furthermore, after the rental agreement is over, the machinery could still be used in another shop. The salvage value of the machinery is expected to be 100.000. ay Inc. is a family-owned business. The corporate tax rate is 20 percent. Ms. ay based upon her experiences in the tea business knows that investors require a minimum rate of return of 30 percent to invest in new ventures. 1) Based on the information provided in the short synopsis, should Ms. Tirebolu consider opening the new shop? Show all your analysis. 2) Please clearly list and discuss all assumptions you made in the analysis. Identify the most important problem areas or assumptions in the analysis that might change the results. 3) Based on your analysis, what is the break-even revenue in year 1. (Hint: You can calculate break-even revenue by setting net income to 0 and solving for the revenue.)
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1 To determine if Ms Tirebolu should consider opening the new tea shop we need to calculate the Net Present Value NPV of the project NPV helps us evaluate whether the investment will generate positive ... View the full answer
Related Book For
Introduction To Materials Management
ISBN: 978-9386873248
8th edition
Authors: Arnold J. R. Tony, Gatewood Ann K., M. Clive Lloyd N. Chapman Stephen
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