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What is the internal rate of return of the project

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First of all, a mobile ice cream parlor has to be rented and chairs and tables have to be purchased. By paying 950 € for the mobile ice cream parlor and 450 € for chairs and tables, the investment sum will amount up to 2,000 € after paying a deposit of 600 € to the confectioner for delivering ice cream the next two semesters. During the 1st semester (t1) - which is a summer semester - it's being estimated that about 5,000 scoops of ice cream at a price of 0.70 € each will be sold. Since the 2nd semester of running the ice cream parlor will be a winter semester, people will be able to sit outside just during half of the semester. Thus, sales volume and therefore revenues will drop, the group reckoned that there will be a sales volume of 2,000 scoops of ice cream at the same price of 0.70 €. Operational out payments will be 0.30 € per scoop in both semesters. The project will be financed by the students' equity and the students assume that the capital cost (r) is 4% per semester.

a) Assuming the data above is true would you suggest to invest in the project using the NPV decision rule?

b) What happens to the NPV if the cost of capital rises to 7% per semester?

c) What is the internal rate of return of the project?

d) What is the NPV of the project if the project can be prolonged another semester and the same sales volume, sales prices and operational outpayments as for the summer semester are true for this third semester? Assume your initial investment lasts also for 3 semesters and cost of capital in again 4% per semester.

e) What happens in this three semester scenario if the students realize they can only realize the estimated sales volume with a price of 0.60 € per scoop in all three semesters?

Reference no: EM133062404

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