Question

Semester Case - Cowboy Ice Cream, Inc. (CIC) As we've examined in prior class periods, CIC is currently considering expanding operations. The first expansion plan—which we've worked on in a previous class—calls for the purchase of a physical location, remodeling of that location, and purchase of a freezer. The freezer would cost $4,289, have an estimated useful life of 7 years, and have a salvage value of $300. Purchase of the freezer would allow CIC to use the new building as a retail space. In addition to that opportunity, CIC is also considering purchasing the building, but using it only as a center of operations (rather than as retail space). As a result, CIC would remodel the space, but purchase of the freezer would not be necessary. Instead, CIC would purchase a small ice cream stand. The stand would cost $7,000, have an estimated useful life of 7 years, and have no salvage value. Both options would require additional working capital of $500, which will be recovered at the end of the life of each option. Assume that CIC's cost of capital is 8%. Details about the operating cash flow for each year are below. Purchase freezer $9,000 Purchase stand $12,000 Estimated cash outflow per year Estimated cash inflow: Year 1 Year 2 Year 3 $9,600 $9,676 $9,761 $13,390 $13,390 $13,390

Answer 1

	Year	Cash Flows		Discounting Factor 8% (3)	Discounted Cash Flow
		Freezer (1)	Stand (2)		Freezer (3*1)	Stand (3*2)
Cash Outflow	0	-$9,000.00	-$12,000.00	1	-$9,000.00	-$12,000.00
Cash Inflow	1	$9,600.00	$13,390.00	0.926	$8,889.60	$12,399.14
Cash Inflow	2	$9,676.00	$13,390.00	0.857	$8,292.33	$11,475.23
Cash Inflow	3	$9,761.00	$13,390.00	0.794	$7,750.23	$10,631.66
Cash Inflow	4	$9,857.00	$13,390.00	0.735	$7,244.90	$9,841.65
Cash Inflow	5	$9,965.00	$13,390.00	0.681	$6,786.17	$9,118.59
Cash Inflow	6	$10,086.00	$13,390.00	0.63	$6,354.18	$8,435.70
Cash Inflow	7	$10,223.00	$13,390.00	0.583	$5,960.01	$7,806.37
Net Present Value (Cash Outflow-Cash Inflow)					$42,277.42	$57,708.34
Pay Back Period
Freezer	9000/9600		0.94	Years
Stand	12000/13390		0.90	Years
Present Value Index
Freezer	NPV/PV of Cash Outflows
	42277/9000
	4.70
Stand	NPV/PV of Cash Outflows
	57708/12000
	4.81