Question

The CFO of the supermarket chain Aldi is examining an investment in a new delivery service for internet orders. The initial investment of the project consists of a cash outflow of €700,000 for the following items: a) distribution fleet, b) computer servers, c) delivery packages, and d) other fixed assets. These assets will be fully depreciated for tax purposes over a 5-year period, which is the lifetime of the project, using the straight-line depreciation method. At the end of this project, the distribution fleet and computer servers can be sold for €60,000.

The revenue of the new service will be equal, for the first year, to 15% of the current total sales of the traditional service, which are €7.5 million. For the following years, the revenues of the new service will be 20%, 25%, 30%, and 35% respectively of the initial traditional sales. This new service for internet ordering is a premium service. Therefore, the prices of the home delivery goods will be 5% higher than the current supermarket prices.

It should be taken into account that the cost of goods sold represents 70% of the supermarket sales price. Aldi expects to spend each year 7% of the sales of the new service for advertising. The company already has the available warehouse capacity needed for this service. The service will occupy 10% of the warehouse. The warehouse is rented at an annual cost of €300,000. The wages for the project workers will be €150,000 per year, however, 20% of them are workers transferred from other Aldi businesses (the company has a lifetime job policy). The distribution costs (fuel, etc.) are 3% of sales of the new service.

The introduction of the new internet ordering service will have as a consequence the reduction of the traditional sales of the supermarket business. Sales in the traditional supermarket business are expected to decrease from €7.5 million a year to €7.4 million a year for the next five years.

Accounts payable are equal to 4% of cost of goods sold, inventory corresponds to 8% of cost of goods sold, and accounts receivables are 10% of sales. At the end of the internet sales project, all remaining net working capital would be liquidated, and the cash recovered. Aldi has profits from its current business, pays taxes of 25% and has a cost of capital equal to 10%

. You are required to:

a. Calculate the project’s profit after tax throughout its five-year cycle

b. What is the change in Net Working Capital for each year?

c. Calculate the project’s Net Cash Flows for each year

d. Evaluate the project according to its NPV, IRR, Profitability Index, and Payback Period

Answer 1

Ware house rent and wages of labour are sunk cost.

Each year only addition to the working capital is to be invested additional not the whole amount but only the excess net working capital over the the previous year.

Million figures have been converted to thousands.

EAT is profits after tax

All working capital has been released in the last year

Decrease in super market sales is also considered as a decrease
3 14 15 Initial (700000) Suvestment Revenue 11812501575000/ 19687502362 500 2756.252 To 5 0000 1312500 787500 1575000 153 1500 128000 2800 - COGS - Dep. - Advesting Expense 28000 128000 128000 82688 110250 137813 165375 192938 bution - 35438 47250 59063 70875 82688 1 Earnings befode 147624239500 331374 423250 515124 36906 59875 82844 10 5813 1287810 - Tax @25% 078 EAT 1796 25 248530 3 17437 38 6343 + Dep. 128000 128000 128000 128000 128000 it working cap (149625 (49875) (99875) (19875) (19875) = (Net) working Cap. 349125 released salvage of 60000 0000) (100000) (100000) (10000) 7288343157750226655295562 364468 I pur(10.1.5) 0.909 0.826 0.751 0.683 0.621 - DUCFAT 262104 130302 170218 201869 226335 SPUCEAT 990828 JPN = PU of inflows - PV of outflows - 990828 - 700000 = 290128 computer - Decrease in the bed (100000 (100000) (100000)/(100000) CFAT

I working capital S Accounts (31500)| (42000) $2500) | (63000) (13500) Payable Inventory 63000 84000 105000 10 6000 I 147000 Accounts 118125 157500 196875236250 275625 Receivable Net working 149625/199500/249375 299250 349125 capital YOOTE Addition/ 49875 49875 49875 49875 Decrease in Nwc
Tthe question is quite lengthy so all parts have not been solved.