Question

Blue Bottle Coffee has opened a new shop in Brooklyn; the initial investment cost of the shop was $300,000. It will produce $65,000 (in constant dollars) of revenue annually for 4 years. The real MARR is 14% and there will be 2.3% inflation annually.

a) Determine the current cash flows for each year considering the inflation rate (actual dollar cash flows). [1 points]

b) Find the PW for the investment (using above actual dollar cash flow values

Hint: It would be easier to calculate the PW if you rounded the market MARR DOWN to the nearest whole number. [2 point]

c) Was the investment worth undertaking? Why? [1 point + 1 point]

Answer 1

As per the article following values are given

Investment = $300,000

Revenue =$65,000 (with annual inflation of 2.3%)

MARR (Hurdle Rate) = 14%

a) Cash Flow at 2.3% inflation per year is as under –

Year 1 – 65000

Year 2 – 66495

Year 3 – 68024.35

Year 4 – 69588.95

b) For PW following formula can be used –

PW = - Capital Investment + Cash inflow for first year /(1 +0.14) + cash inflow for second year / (1+0.14)^2 + cash inflow for third year / (1+0.14)^3 + cash inflow for fourth year / (1+0.14)^4

Substituting the values

PW = - 300000 + 57017.54 + 51165.74 + 45914.52 + 41202.24

PW = -104700

c) The investment in not worth undertaking since the NW is negative