Reference no: EM132554468
ZIPE Co. which is the market leader in the sector in which it operates, wants to continue its success in the international arena. First of all, firm plans to open a store in the city center of Berlin, Germany.
The CEO of the company traveled with the senior managers and asked the finance manager to submit a feasibility report. The finance manager has reached the following figures in coordination with other departments.
The rentals of the shops in the area where investment is planned are quite expensive. Nevertheless, it is not a situation that cannot be tolerated both in terms of the target customer volume and the prestige of the company.
The rental cost a shop in this area of the firm will be € 240,000 per year. Also, in Germany, wages are expected to be higher than in Turkey. The number of personnel required is determined and the total cost is expected to be € 300,000.
In addition to these costs, the company is expected to incur operating costs of € 120,000 annually. By the way, it is necessary to advertise with a huge commercial campaign. The € 200,000 ad budget for the first year will be reduced to € 50,000 in the following years. In spite of these costs, the company is expected to reach a sales figure of € 6,500,000 for the first year. In a project with a 10-year economic life expectancy, sales will rise to € 7,000,000 for the second year, € 7,500,000 for the third year, and € 8,000,000 for the third year and will remain stable at this level.
Firms earn up to 20% of gross profits and 80% of sales. In order for the firm to open such a shop in Germany, it has to invest a fixed asset of € 5,000,000. It is expected that the scrap value of the investment made at the end of 10 years will be zero. The tax rate for the firm is 20%, the cost of capital is 8% and the depreciation is straight line method.
So, what would be your decision as a finance manager?