Reference no: EM132006073

You’ve spent probably $2k in your “lab” and research. In addition, you have just received an invoice, and a report, on a test market that you commissioned from a research firm for $3k -- $1.5k due now, and $1.5k due in 90 days. To get the ice cream shop ready and off the ground, serving your certain-to-be loyal customer base, will require some additional design and development costs of $15k. This will be incurred during the first year and should be expensed for tax purposes. Purchase of new equipment to produce these yummy treats will cost $50k. You plan to depreciate all equipment capital expenses over 4 years to zero using straightline depreciation. You expect the equipment to have a market value of ~$10k in four years.

You’ve found a nice location that you can rent for $4k/month, but must sign a 4 year lease. You are confident you can reach out to other local organizations to help promote the business, and thus predict you can generate unit sales of 10k in YR1, 20k in YR2, 25k in YR3, and 30k in YR4. You estimate the initial average selling price $5.50 per unit, increasing by $0.50 per year through YR4. Initial variable selling costs are expected to be $2.50 per unit initially, and expected to increase $0.25 per year through YR4. Initial inventory and cash of $3k will be needed and put in place before start-up, and expected to increase by 10% per year to aid the business through the analysis horizon. On-going Marketing expenses are expected to initially be $5k, starting in year 1, and Other Operating expenses are expected to initially be $8k; both will continue through the 4-year analysis horizon.

Inflation is expected to be 3% per year; Taxes are 30% and the Required Rate of Return is 10%.

Should you pursue the opening of this ice cream shop?

Justify your answer using appropriate evaluation techniques such as NPV, IRR, Profitability Index, and Payback Period

Excel spread sheet can be used