Question

Athens Book Nook is experiencing flat sales growth and seeks to grow the business. A proposed...

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 $25,000 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:

$20,759

$5,321

$14,228

$2,233

-$8,929

Homework Answers

Answer #1

After tax cash flow from only Coffe shop = $25,000

Additional Cash Flow from others = 200 customers * 52 weeks * $25 * 40% * 15% = $15,600

Annual Cash Flows = $25,000 + $15,600 = $40,600

NPV of the Coffee shop project is -$8,929

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