Sovrano Caf is considering a major expansion of its business. The details of the proposed expansion...

 

Transcribed Image Text:

Sovrano Café is considering a major expansion of its business. The details of the proposed expansion project are summarized below: o The company will have to purchase $950,000 equipment, that require installation cost and transportation cost equal $100,000. o The project has an economic life of 5 years. o The cost can be depreciated using straight line method. o At t=0, the project requires that working capital will increase by $200,000 o The project's salvage value at the end of 5 years is expected to be $60,000. o The company forecasts that the project will generate $725,000 in sales the first 2 years and $650,000 in sales during the last 3 years o Each year the project's operating cost excluding depreciation is expected to be 50% of sales revenue. o The company's tax rate is 40% o The company already pays marketing expenses equal 80,000. o The project's cost of capital is 10% What do you recommend? Sovrano Café is considering a major expansion of its business. The details of the proposed expansion project are summarized below: o The company will have to purchase $950,000 equipment, that require installation cost and transportation cost equal $100,000. o The project has an economic life of 5 years. o The cost can be depreciated using straight line method. o At t=0, the project requires that working capital will increase by $200,000 o The project's salvage value at the end of 5 years is expected to be $60,000. o The company forecasts that the project will generate $725,000 in sales the first 2 years and $650,000 in sales during the last 3 years o Each year the project's operating cost excluding depreciation is expected to be 50% of sales revenue. o The company's tax rate is 40% o The company already pays marketing expenses equal 80,000. o The project's cost of capital is 10% What do you recommend?

Answer rating: 100% (QA)

Calculations Initial investment 950000 100000 200000 1250000 Annual depreciation 1250000 5 ... View the full answer