You are considering the following business opportunity. Your constant dollar minimum rate of return is 15%. You assume the current inflation rate of 4%/yr. will be maintained for the foreseeable future. You evaluate all investment opportunities on a 3 year project life. Specifically, you are considering buying a corner snow cone business for $100,000. As a conservative business person, you assume zero salvage value at the end of the project. You assume annual sales of 12,000 snow cones per year. The price of a snow cone in year 1 is $5.00/ea. (you make exceptionally good snow cones!!!) You assume you will be able to increase the price 10% year. Operating costs are estimated to be $8,000/yr. (escalated dollars) in year 1 and to escalate 14% and 16% in years 2 and 3, respectfully.
a) Evaluate the project on a “today’s dollars” basis. That is, neglect all price and cost escalation. Use ROR, NPV, and PVR as your evaluation methods.
b) Determine whether the project is economically attractive using an escalated dollar analysis. As before, use ROR, NPV, and PVR as your evaluation methods
c) Perform a Year 0 constant dollar analysis using ROR, NPV, and PVR. Verify that the constant dollar ROR agrees with the escalated dollar ROR from part (b).