You run The Empourium[1], a local brewery with an attached bar. Sales have slowed down and you feel like you need to do something to jazz things up. You’ve saved up $300,000 in free cash, and you demand an annualized return of 7% on any investment you make. Here are some things you could do with that money.

1. You can buy a set of three new fermentation tanks. Upfront cost (including purchase price, setup, and inspection) is $50,000. The tanks will let you increase the variety of beers you produce. You’d sell about $25,000 more beer per year, but the additional ingredients and labor will run you an extra $18,000 every year. The tanks will last about 10 years before needing to be scrapped.
2. You can enter into a concessions contract with a local sports stadium[2]. At a $60,000 up-front cost, you’d have Emporium beer being sold at very high prices during all major sporting events, concerts, etc. This would net you about $80,000 in extra revenue per year, but the beer would cost about $51,000 per year to make, and you’d also have an extra $10,000 in annual transportation costs. The contract would be good for five years.
3. You could start selling food at your restaurant. Your state has some wacky liquor laws, though, and selling food means you’d have a one-time licensing fee of $250,000. After all is said and done, you’ll be earning an extra $80,000 per year for the foreseeable future (let’s say 10 years).
4. You could try rebranding. Hire some marketing and communications folks to do a slick logo redesign, change the beer’s packaging, etc. A local firm has quoted you a price of $200,000 to do this, and they figure this new rebranding would last for 6 years.

Here are your questions:

1. Keeping in mind that you’ve only got $300,000 to work with, which combination of the first three choices will give you the highest total NPV? (It could just be one, more than one, or even none at all, as long as your initial outlay doesn’t exceed $300,000.)

2. Are there any among the first three choices that you should refuse regardless of how much money you have? (Do any have a negative net present value, in other words?)

3. (This one’s a challenge.) Consider the fourth option. What’s the lowest your extra annual earnings would have to be in order to justify spending $200,000 on the rebranding effort?

Answer rating: 100% (QA)

1 To get highest NPV select only option 3 at initial cost of 250000 giving an NPV of 31188652 first ... View the full answer