You work in the Finance Department of the supermarket chainSuper.The company is planning to expand its business

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Question:

You work in the Finance Department of the supermarket chain ‘Super’. The company is planning to expand its business by offering online orders and home delivery. The CEO and CFO need your expertise to decide whether it would be beneficial to pursue the new business

project.

The project will have a lifetime of 5 years and the top management will decide after these 5 years if this service will be offered permanently. Super plans to spend £750,000 now on advertising and £80,000 during the first year of the project.

To set up the new service, Super has to invest in a fleet of delivery vans, the web portal, warehouse capacity, delivery crates etc. This initial investment will be approximately£2,250,000. It is estimated that at the end of 5 years, the delivery vans and the delivery equipment can be sold for £10,000.

The wages for the delivery drivers who have to be hired for the new service will be £500,000 per year.

In the first year, Super expects revenues from sales via the online/delivery service £600,000, in the second year of £1,500,000, £2,500,000 in year 3, £2,000,000 in year 4 , and £4,500,000 in the final years of the project. The discount rate Super uses is 5% and they usually expect projects to be paid back after 5 years.

Tasks

a) Evaluate the project above using the following measures of Net Present Value, Payback and Discounted Payback Period as well as the Profitability Index, and advise on whether Super should offer home delivery.

b) Advise the CEO and CFO on whether it would be beneficial for the company to offer online ordering and home delivery. To do so, write a report to explain the findings from a) and discuss the benefits and drawbacks of each of the methods used in a). Conclude your position.