Question

ZIPE Co. which is the market leader in the sector in which it operates, wants to continue its
success in the international arena. First of all, firm plans to open a store in the city center of
Berlin, Germany. The CEO of the company traveled with the senior managers and asked the
finance manager to submit a feasibility report. The finance manager has reached the
following figures in coordination with other departments.
The rentals of the shops in the area where investment is planned are quite expensive.
Nevertheless, it is not a situation that cannot be tolerated both in terms of the target
customer volume and the prestige of the company. The rental cost a shop in this area of the
firm will be € 240,000 per year. Also, in Germany, wages are expected to be higher than in
Turkey. The number of personnel required is determined and the total cost is expected to be
€ 300,000. In addition to these costs, the company is expected to incur operating costs of €
120,000 annually. By the way, it is necessary to advertise with a huge commercial campaign.
The € 200,000 ad budget for the first year will be reduced to € 50,000 in the following years.
In spite of these costs, the company is expected to reach a sales figure of € 6,500,000 for the
first year. In a project with a 10-year economic life expectancy, sales will rise to € 7,000,000
for the second year, € 7,500,000 for the third year, and € 8,000,000 for the third year and
will remain stable at this level. Firms earn up(increase) to 20% of gross profits and 80% of cost of goods sold.
In order for the firm to open such a shop in Germany, it has to invest a fixed asset of €
5,000,000. It is expected that the scrap value of the investment made at the end of 10 years
will be zero. The tax rate for the firm is 20%, the cost of capital is 8% and the depreciation is
straight line method.

So, what would be your decision as a finance manager?

Answer 1

The cashflows calculation per year is shown in the table below

Year	0	1	2	3	4	5	6	7	8	9	10
Sales		6500000	7000000	7500000	8000000	8000000	8000000	8000000	8000000	8000000	8000000
Cost of Goods Sold		5200000	5600000	6000000	6400000	6400000	6400000	6400000	6400000	6400000	6400000
Rental Cost		240000	240000	240000	240000	240000	240000	240000	240000	240000	240000
Personnel cost		300000	300000	300000	300000	300000	300000	300000	300000	300000	300000
operating cost		120000	120000	120000	120000	120000	120000	120000	120000	120000	120000
Advertisement cost		200000	50000	50000	50000	50000	50000	50000	50000	50000	50000
Depreciation		500000	500000	500000	500000	500000	500000	500000	500000	500000	500000
EBT		-60000	190000	290000	390000	390000	390000	390000	390000	390000	390000
Less Tax @20%		-12000	38000	58000	78000	78000	78000	78000	78000	78000	78000
PAT		-48000	152000	232000	312000	312000	312000	312000	312000	312000	312000
Add Depreciation		500000	500000	500000	500000	500000	500000	500000	500000	500000	500000
Capital Cost	-5000000
Cashflows	-5000000	452000	652000	732000	812000	812000	812000	812000	812000	812000	812000

NPV = -5000000 + 452000/1.08+652000/1.08^2+ .... + 812000/1.08^10

= - 85428.03 Euros

As the NPV is negative , the project should not be undertaken.