Question

Expected sales are 800,000 for five years, and direct costs including labor and materials will be 50%. Indirect costs are estimated at 200,000 a year. The building for the new cafe will be a total of 850,000, which will be depreciated. Also, the firm's marginal tax rate is 38%, and its cost of capital is 10%.

A. Calculate the Net Present Value (NPV)
B. Determine the Return on Investment (ROI)
C. Estimate the Break-Even Point
D. Assess the Internal Rate of Return (IRR)

Answer 1

To calculate the Net Present Value (NPV), we need to discount the expected sales and costs for each year using the firm's cost of capital. The Return on Investment (ROI) is the net profit divided by the initial investment. The Break-Even Point is the level of sales at which the firm's revenue equals its total costs.

Step-by-step explanation:

To calculate the Net Present Value (NPV), we need to discount the expected sales and costs for each year using the firm's cost of capital. Then, we subtract the initial investment from the sum of the discounted cash flows.

To determine the Return on Investment (ROI), we divide the net profit (sales minus costs) by the initial investment and express it as a percentage.

The Break-Even Point is the level of sales at which the firm's revenue equals its total costs, resulting in zero economic profit.

The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value equal to zero.