Question

Suppose that Home Depot decides to add a coffee shop in the middle of the store to encourage more browsing by customers. This business will hire some additional employees, but analysts believe the coffee shop will require the store general manager to work 15 more hours per week. This will increase the general manager’s salary by $15,862.00 per year. Home Depot has a 40.00% tax rate, a 12.00% cost of capital, and is evaluating this project over a 6.00-year period. What is the net opportunity cost to adding the coffee shop? (HINT: Value the extra gain in the manager’s salary. EXPRESS as a positive number)

Answer 1

	computation of opportunity cost
	Increase in manager salary =		15,862
	Tax rate =		40%
	Post tax increase in salary = 15862*(1-40%)		9517.2
	Computation of present value of post tax increase in salary
		i	ii	iii=i*ii
	year	Post tax salary	PVIF @ 12%	present value
	1	9517.2	0.8928571	8,497.50
	2	9517.2	0.7971939	7,587.05
	3	9517.2	0.7117802	6,774.15
	4	9517.2	0.6355181	6,048.35
	5	9517.2	0.5674269	5,400.31
	6	9517.2	0.5066311	4,821.71
				39,129.09
	therefore opportunity cost =	39,129.09