Question

Athens Book Nook is experiencing flat sales growth and seeks to grow the business. A proposed project will add a coffee shop to the store. The goal is to create extra book sales by bringing more customers into the store.

The cost of the coffee shop investment will be $250,000 today. The store estimates that the cash flows from ONLY the coffee shop will be $30,000 per year (after-tax cash flows) over a 11-year project period.

The owners of the store estimate that the new coffee area will bring in an additional 200 customers per week. (52 weeks per year) For these new customers, 40% will purchase books and magazines. The average purchase by a customer is $25.00 for books and magazines. The after-tax operating margin for the store is 15%. These cash flows are valued on an annual basis.

                  

The cost of capital for the store is 12% APR, while the marginal tax rate is 34%.  

What is the NPV of the coffee shop project?

Question 13 options:

	$2,233
	$5,321
	$14,228
	-$8,929
	$20,759

Answer 1

Initial Outlay = Cost of Shop		250000
Cash Flows = After TaxCash Flow from coffee shop+Margin on Books & Magazines	30000+ [200*52*25*0.4*0.15]	45600
Year	Discounting Factor [1/(1.12^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
0	1	-250000	-250000
1	0.892857143	45600	40714.28571
2	0.797193878	45600	36352.04082
3	0.711780248	45600	32457.1793
4	0.635518078	45600	28979.62438
5	0.567426856	45600	25874.66462
6	0.506631121	45600	23102.37913
7	0.452349215	45600	20627.12422
8	0.403883228	45600	18417.0752
9	0.360610025	45600	16443.81714
10	0.321973237	45600	14681.97959
11	0.287476104	45600	13108.91035
		NPV = Sum of PVs	20759.08044