Refer back to given Problem
(a) Assuming base case figures for advertising costs and interest rates, what is the breakeven number of deliveries per month? Construct a graph showing the break-even number.
(b) Assuming base case figures for advertising costs and number of deliveries per month, what is the break-even interest rate? Construct a graph illustrating the break-even interest rate.
Problem :
You and two friends are thinking about setting up a grocery delivery sendee for local residents to finance your last two years at university. In order to start up the business, you will need to purchase a car. You have found a used car that costs $6000 and you expect to be able to sell it for $3000 at the end of two years. Insurance costs are S600 for each six months of operation, starting now. Advertising costs (e.g., flyers, newspaper advertisements) are estimated to be $100 per month, but these might vary as much as 20% above or below the $100, depending on the intensity of your advertising. The big questions you have now are how many customers you will have and how much of a service fee to charge per delivery. You estimate that you will have 300 deliveries every month, and are thinking of setting a S2-per-delivery fee, payable at the end of each month. The interest rate over the two-year period is expected to be 8% per year, compounded monthly, but may be 20% above or below this figure.
Using equivalent monthly worth, construct a sensitivity graph showing how sensitive the monthly worth of this project will be to the interest rate, advertising costs, and the number of deliveries you make each month. To which parameter is the equivalent monthly worth most sensitive?