Case Study: 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
|
Purchase stand
|
|
Estimated cash outflows per year
|
$9,000
|
$12,000
|
|
Estimated cash inflow:
|
|
|
|
Year 1
|
$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
|
Required - Compute the net present value for each option.
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