You are helping a bookstore decide whether it should open a coffee shop on the

premises. The details of the investment are as follows:

The coffee shop will cost $50,000 to open; it will have a five-year life and be

depreciated straight line over the period to a salvage value of $10,000.

The sales at the shop are expected to be $15,000 in the first year and grow 5 percent a

year for the following four years.

instead of five? Yes.>

The operating expenses will be 50 percent of revenues.

The tax rate is 40 percent.

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The coffee shop is expected to generate additional sales of $20,000 next year for the

book shop, and the pretax operating margin is 40 percent. These sales will grow 10

percent a year for the following four years.

a. Estimate the net present value of the coffee shop without the additional book sales.

b. Estimate the present value of the cash flows accruing from the additional book sales.

c. Would you open the coffee shop?