Question

You are the owner of a whitewater raft company/retail outlet operating out of Northern Colorado. Your business has been quite successful, and you have decided to expand by opening a second operation in the Southeast United States. You have determined that this would require an initial investment of $250,000.

A) What types of costs would you have to consider in arriving at that $250,000 figure?

B) You also determined that this expansion would result in net cash inflows of $30,000 per year over the next 12 years. In speaking with your banker, the two of you estimate that you could earn, on average, 7% interest each year on this money if invested differently. Compute the following regarding this project. Be sure to show evidence of how you came up with the computations.

i. Net Present Value

ii. Profitability Index

1. iii. Payback Period
2. C) Based on the information above, would you open the new location in Southeast United States? Why or why not?

Answer 1

A]	The following types of cost would have to be
	considered:
	*The cost of plant and machinery
	*Costs of shipping and delivery
	*Transit insurance
	*Costs of installation
	*Costs of testing and trial runs
	*Training costs
	*Increase in net working capital
B]
i]	PV of net cash inflows = 30000*(1.07^12-1)/(0.07*1.07^12) =	$     2,38,281
	[The formula for finding PV of annuity is used]
	Less: Initial investment	$     2,50,000
	NPV	$       -11,719
ii]	Profitability index = PV of cash inflows/Initial investment = 238281/250000 =	0.95
iii]	Payback period = Initial investment/Annual cash inflows = 250000/30000 =	8.33	Years
C]	As the NPV is negative, the new location need
	not be opened.