Brissy is considering setting up her new salon with state-of-the-art equipment to provide best services to customers. She is planning to rent a space for the salon. She would sell some of the existing equipment and furniture and replace them with new equipment furniture. You have worked with Brissy and identified the following cash flows and other information.

Start-up costs:

Cost of new equipment and furniture: $ 150,000

Interior decorations and renovations: $60,000

Annual operating activities are estimated as follows.

Projected Revenue: $80,000 in year 1, $ 100,000 in year 2, $150,000 from year 3 – 10

Projected cost of labour: 25% of the annual revenue

Annual rent: $20,000

Other annual operating costs (including utilities but excluding rent and depreciation): 15% of the annual revenue

Depreciation: Building improvements, equipment and furniture will be depreciated under straight-line method for 10 years

Tax: 20% (losses can be carried forward and deducted from taxable income in the future)

Estimated discount rate: 14%/year

Before handing over the shop space, the building owner requires you to revert the interior changes you made, restoring it to its original state. This will cost an additional $10,000 on restoration process.

Required

Calculate net present value (NPV) and internal rate of return (IRR) for the project. You should show all your workings and calculations in the excel sheet. Assuming Brissy targets to recover her investment in 5 years, would you recommend her to undertake the proposed investment in her new business? You should explain your decision based on each evaluation method.

Answer rating: 100% (QA)

To calculate the net present value NPV and internal rate of return IRR we need to determine the cash flows associated with the project First lets calc... View the full answer