You decide to help I.M. with his analysis. A good fax machine costs $500 and functions properly for 5 years. The phone company charges $300 for installing a new line and $60 a month for the line. A new delivery van costs $20,000 and can be financed for 60 months with a $4,000 down payment. I.M.’s bank will finance the van at 5.5 percent compounded monthly, and you calculated his weighted average cost of capital at 8 percent. You found that a 5-year-old van of this model sells for $5,000. After discussing the business venture with several retired restaurant owners at the local SCORE office, you believe that I.M., after paying his food costs, will increase his breakfast and lunch trade by $2,000 a month. I.M. can hire a part-time driver for $600 a month. The vehicle depreciates straight line for 5 years, or $3,000 per year. I.M. is a sole proprietor and is in a 20-percent tax bracket. You estimate that it will cost I.M. $300 a month to pay for maintenance, upkeep, and insurance on the van.
a. If I.M. decides to establish a delivery service and pays for the fax machine in cash, how much cash does he need now?
b. What is the monthly payment for the delivery van?
c. Using the time value of money and a 5-year life for this project, what is the present value of all of I.M.’s costs?
d. Using the time value of money and a 5-year life for this project, what is the present value of all of I.M.’s benefits?
e. What is the NPV of the delivery service?
f. What is the PI of the delivery service?
g. What is the payback?
h. What recommendation would you give to I.M. with regard to this project?