Question: EXAMPLE 5: Bookscape Books is considering adding a cafe to its bookstore. The cafe, it is hoped, will make the bookstore a more attractive destination

EXAMPLE 5: Bookscape Books is considering adding
EXAMPLE 5: Bookscape Books is considering adding a cafe to its bookstore. The cafe, it is hoped, will make the bookstore a more attractive destination for would-be-shoppers. The following information relates to the proposed cafe: The initial cost of remodeling a portion of the store to make it a cafe and of buying equipment is expected to be $150,000. This investment is expected to have a life of five years, during which period it will be depreciated using straight-line depreciation. Non e of the cost is expected to be recoverable at the end of the five years. The revenues in the first year are expected to be $60,000, growing at 10% a year for the next four years. There will be one employee, and the total cost for this employee in year 1 is expected to be $30,000, growing at 5% per year for the next four years. The cost of the material (food, drinks) needed to run the cafe is expected to be 40% of revenues in each of the five years. An inventory amounting to 5% of the revenues has to be maintained. Investments in the inventory are made at the beginning of each year. The tax rate for Bookscape as a business is 42%. The NWC at the end of year 5 is completely recoverable. The cost of capital is 11.75%. What is the NPV of the project as a stand alone project? Now, consider this possibility: Assume that the cafe will increase revenues at the bookstore by $500,000 in year 1, growing at 10% a year for the following four years. In addition, assume that the pre-tax operating margin on these sales is 10%. Incorporate the cash flows into your analysis and re-evalute

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