Consider the below scenario for Svens Baguettes that lays out a capital investment plan for...
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Accounting
Consider the below scenario for Svens Baguettes that lays out a capital investment plan for 10 years:
Baguette price: $3.99 Production: Year: 800 baguettes/month during year 1. Increasing by 10% each subsequent year. Costs of goods manufactured: $0.60/baguette Overhead costs (utilities, rent, marketing, leasing): $1,500/months
The business seeks to invest in a new (used) delivery truck costing $8,000. Assume that CCA for this asset is fixed at $300 per year (($150 in first year!, Salvage value in year 10 is $500). The interest on the vehicle loan is 8%/year. Monthly costs of operating the vehicle (gas, insurance, registration, incidentals) are estimated at $85. In year five and onwards the business expects an additional $60/month in maintenance costs.
a) (20) Calculate NPV and make a statement on the expected profitability of this investment.
b) (5) Calculate the internal rate of return (ITT) for this investment scenario. How does the businesses 8% vehicle loan compare to the calculated IRR?
c) (5) Calculate the Benefit cost ratio of the net cash flows for is investment and interpret your result.
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