Question

Survey of Accounting Class 24 Packet 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 54.289, 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 Purchase freezer stand Estimated cash outflow per year $9,000 $12.000 Estimated cash inflow. Year $9.600 $13,390 Year 2 $9.676 $13.390 Year 3 $9.761 $13,390 Year 4 $9.857 $13,390 Year 5 $9.965 $13,390 Year 6 $10,086 $13,390 Year 7 $10.223 $13.390 Compute the following for each option: 1. Net present value

Answer 1

Stand 7000 500 By Freezea 5 Initial olf 4289 Initial wil 500 Salvage Value 300 = Recovery at Pf. 500 - Period and - Cost of capital 8% 5 Estimated offfer 9000 500 8% 12000 I life Zyears 7 years

KPMG INPU - K200 7500 - (1990x (CPUF @ 8%. for 7 yrs X Puf@8% of 7th Year 7828. 28. 6 to with freezer

24 Present Value Iudea of 4886.38 4789 1.020 Stand of 7.628.6 a 1.0038 750o 4) Payback period. freezen Net Cummulative I Vale. 2 600 1271 2032 600 676 1761 857 965 1086 (223 800 38.24 Youo 6163 6963 I

+ uauo-4789 4940-3854 a 5.13 9 years Staud of 75+ 8340 - 7529 x 8340-baro 25. 583 years

1) NPV - Freezer:- year. Not lue Puf P.U . Боо Ың, 14) Ч 4. ТОВ. 1223 %oo о. 926 О. #s О. 149 С. 35 О. 68) О. Бо р. 583 oS03 SS5, 6 Sas. 2 bo4. ) b24. 4 66. 2 23ч. 3 13 .. чь. ч%8Ь 38 87 NPU = off- Ilf 41 4284 +5oo - 48038 з 92.36