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SHOW ALL WORK FOR FULL CREDIT SuperGrocers, a local supermarket, is considering setting up a dedicated bakery to sell highend cakes and pastries on the premise of their supermarket. You have been tasked to assess whether such an expansion makes sense. You have gathered the following information. - SuperGrocers has already completed a market survey that suggests that there is a market for high-end cakes and pastries. The market survey cost $500,000, which will be capitalized and depreciated straight line over four years to a salvage value of zero. - SuperGrocers expect this new bakery project to last for four years. - The initial investment needed for the new bakery, including the installation of ovens and renovation of a new kitchen, will be $400,000. These investments will be capitalized and depreciated straight line over 4 years to a salvage value of zero. - The revenue from the bakery is expected to be $600,000 annually. - The space in the supermarket that is proposed to be used for the bakery is currently being used as an office to store financial records. If SuperGrocers decides to invest in the bakery, the records will be moved to a bank vault which will cost $10,000 a year to rent. - The supermarket currently pays $100,000 in electricity bill a year. If SuperGrocers decides to start the bakery, the annual electricity bill at the supermarket will increase to $120,000. SuperGrocer plans to allocate a third of the new total electricity bill to the bakery. - SuperGrocers would need to hire two full-time bakers. Their total annual salaries are expected to be $120,000. - The cost of the materials for the baked goods are estimated to be 50% of the revenues for each of the four years. - The working capital investment is expected to be 10% of annual revenues. The investment would have to be made at the beginning of each year. At the end of Year 4 , the entire working capital is salvaged at book value. - The marginal tax rate is 40%. - The hurdle rate for evaluating the project is 10%. a) Calculate the NPV on this project. Would you accept the project? (15 marks) b) The current annual sales of the supermarket is $1 million. It is expected that the sales at the supermarket will increase to $1.2 million with the addition of the bakery. The after-tax operating margin at the supermarket is 40% on sales. To ensure no lost sales, SuperGrocers has to maintain an inventory stock of 10% of expected annual revenue at all times, with the investment made at the beginning of the year. Assume the cost of capital for the supermarket is also 10% and that the increase in revenue lasts only as long as the bakery is operating, estimate the value of this synergy. (10 marks) (TOTAL: 25 marks)