Question

			One year	Two years	Three years	Four years
Berry Bang's sold		1750	91000	93730	96542	99438
Revenue		$7.00	637,000	656110	675793	696067
Cost of Sales		$1.87	170,170	175275	180533	185949
Royalty		8.00%	50,960	52489	54063	55685
Marketing		7.00%	44,590	45928	47306	48725
Total Variable Costs			265,720	273,692	281902	290359
Contribution			371,280	382,418	393891	405708
Full-Time Employee Costs		$42,000	84,000	84,000	84,000	84,000
Casual Employee Costs		$18.93	70,874	70,874	70,874	70,874
On-Costs		30%	46,462	46,462	46,462	46,462
Total Employee Costs			201,336	201,336	201,336	201,336
Store Costs (outgoings)		$1,600	19,200	19,200	19,200	19,200
Occupancy Cost (rent)		$3,500	42,000	42,000	42,000	42,000
Total Operating Costs			262,536	262,536	262,536	262,536
EBITDA		17%	108,744	119,882	131,355	143,172
Interest	150,000	6.00%	9,000	9,000	9,000	9,000
Depreciation	300,000	10.00%	30,000	30,000	30,000	30,000
Total Fixed Costs			301,536	301,536	301,536	301,536
Pre-Tax Profit			69,744	80,882	92,355	104,172
Tax		30%	20,923	24265	27706	31252
Net Income			48,821	56,618	64,648	72,920

NPV = -104966.53$

Initial Investment = 300000$

Cash Flow for each year = 56285$

Discount rate = 6%

WACC= 8.9%

CAPM = 11.245%

Advise Brittney as to the financial worth of the proposed investment in a Top Juice franchise, including in your advice an explanation as to the significance of a positive or a negative NPV.

Identify the major arguments in support of your investment advice to Brittney.

Identify the major risks, which Brittney might face in making this investment.

Answer 1

The above calculation of negative NPV is incorrect.

The correct calculation for the given 4 years NPV is:-

Particulars	1	2	3	4
Net Income	48,821	56,618	64,648	72,920
Depreciation (Added back, as non cash item)	30,000	30,000	30,000	30,000
Net Cash Flow	78,821	86,618	94,648	102,920
K = 6% (1/K^n)	0.9434	0.8900	0.8396	0.7921
NPV	74,359.73	77,090.02	79,466.46	81,522.93

NPV = Cash Inflows - Cash Outflows

= $312,439.14 - $300,000

= $12,439.14

Since the NPV is positive, she should go ahead with the proposed investment.

NPV is net present value. It is the series of cash flows which we will be receiving in the future after considering the inflation effect on the same. So, it is called the present value. Having positive NPV is very important because positive NPV shows that we will be profitable in the future after considering the cost of our investment.

We have advised to go ahead with the proposed investment because,

The above calculation is just for 4 yearsm, however the life of the project/asset is 10 years. So, just in 4 years it has shown positive NPV, in 10 years it will be more profitable.

Major risks, which Brittney might face in making this investment.

Increase in labour costs.

Increase in material costs.

Increase in the discount rate.

Decrease in the cash flows.