Will you recommend patricia to invest in the project

Reference no: EM133322692

Case: ABC Co has been fired out after 20 years working for the same company. Fortunately, following the advice of her friend Eduardo, she had saved a great part of her salary (no husband or kids studying a Double Degree or Master helped a lot). She added the indemnity and "reinvested" it all €30,000 at the casino last week getting 36 times the total amount so she has now a great capacity for a new "investment". As she is pretty sure luck doesn't come twice at the casino, she decided to open a boutique in Paseo de Gracia in Barcelona. Its name will be MANGΩS. Her auntie did it 4 years ago and she has sold it, now, for € 500,000, when she decided to retire at the age of 55 to enjoy life. Patricia is convinced she could get, minimum, the same when she will sell the shop, after 4years. The project will need a fixed asset investment of €1,000,000 at the beginning of the first year and €90,000 more at the beginning of the second one. The first investment will be depreciated 25% each year during 4 years. The second one will be depreciated equally during 3 years. They will have null residual final value. On the third and fourth year they will need to expend just 10,000 each year for maintenance.
She forecasted:

• Sales volume of €1,000,000 the first year, increasing 10% the next ones.
• Cost of goods sold will be 40% of sales every year.
• Salaries will be €150,000 the first yearincreasing 5% on the next ones.
• Rentforthe building will be €40,000.It will, also, increase 5% every year.
• General and other costs will be €12,000 and €50,000,respectively.
Their increase will be 3% every year.
• Tax rate will be 30%.
• Except suppliers, every cost will be paid cash, including taxes.Considering operating working capital needs, she will offer her customers to finance them for 15 days through a MANGΩS' credit card, suppliers will give her 90 days and she will need to stock for 120 days, both on COGS base. We will not consider VAT effect in any case. (No operational cash needed.) Her best friend Ivan, a financial consultant, has offered her to analyze the project and he askshis teamtohelpthemwithit.Ivanasksyouto prepare forthe nextfour years:
• Income statements.
• Balance sheets (initial and final)
• Free Cash flows of theproject
• PV & NPV
• IRR & MIRR

Question: Ivan has informed you that the appropriated discount rate for this case is 10% After doing it, will you recommend Patricia to invest in the project or to go back to the casino? Do you considerfour years a correct period to analyze this project?

Reference no: EM133322692

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