A local bookstore is considering adding a coffee shop to their store. Building the coffee shop...

A local bookstore is considering adding a coffee shop to their store. Building the coffee shop will cost $235,956.00 today. The bookstore is going to try this project for five years. The bookstore wants a 12.00% return on their investment. What yearly cash flow must this project generate to “break-even”?

Answer format: Currency: Round to: 2 decimal places.

Solutions

Expert Solution

Breakeven of the project is the level of output at which, generated revenue covers the cost of the project. Net profit or NPV must be zero at breakeven.

So, we can find out annual cashflow by equating NPV of the project as $ 0.

NPV = PV of annual cash flow – Initial investment

$ 0 = Annual cash flow x PVIFA (12 %, 5) – $ 235,956

Annual cash flow x PVIFA (12 %, 5) = $ 235,956

Annual cash flow x [1-(1+0.12)-5/0.12] = $ 235,956

Annual cash flow x [1-(1.12)-5/0.12] = $ 235,956

Annual cash flow x (1- 0.567426855718599)/0.12] = $ 235,956

Annual cash flow x (0.432573144281401/0.12) = $ 235,956

Annual cash flow x 3.60477620234501 = $ 235,956

Annual cash flow = $ 235,956/3.60477620234501

= $ 65,456.4907098821 or $ 65,456.49

The project should generate yearly cash flow of $ 65,456.49 to break-even.

jeff jeffy answered 1 year ago

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