True Fresh Grocery operates a chain of 40 grocery stores. Currently the company is considering starting a new division, TrueFresh.com, to provide home delivery services. Customers will be able to order groceries by phone or using the Internet, and TrueFresh.com will deliver them within 24 hours at a price guaranteed to be identical to the prices charged in the company’s stores. The company has projected revenue and cost related to this business for the next 7 years, as follows:
The business will require an initial investment in delivery trucks and other equipment of $500,000. The trucks and equipment will be depreciated over a seven-year life using straight-line Depreciation with a Residual Value of $80,000. Required: Assume that True Fresh has decided to limit its analysis to 7 years. Calculate the Net Present Value of the new business using a 14 percent Required Rate of Return. Should True Fresh make the investment in the new business?
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Revenue $1,700,000 $1,870,000 $2,057,000 $2,262,700 $2,488,970 $2,737,867 $3,011,654 Less expenses: Cost of merchandise 1,120,000 1,175,000 1,200,000 1,200,000 1,260,000 1,300,000 1,375,000 Salaries 350,000 365,000 380,750 397,000 414,652 432,884 462,030 Depreciation 60,000 60,000 60,000 60,000 60,000 60,000 60,000 Miscellaneous 20,917 1,661,667 27,015 23,333 1,553,333 21,667 1,621,667 28,000 28,783 1,761,667 27,970 1,925,000 Total expense 1,685,000 1,821,667 Income before taxes 146,667 248,333 395,333 577,700 727,303 916,200 1,086,654 Taxes at 40% 58,667 99,333 158,133 231,080 290,921 366,480 434,662 Net Income 88,000 $ 149,000 237,200 $ 346,620 $ 436,382 $ 549,720 $ 651,992