Super Fresh Grocery operates a chain of 40 grocery stores. Currently the company is considering starting a new division, Fresh Grocer.com, to provide home delivery services. Customers will be able to order groceries by phone or using the Internet and Fresh Grocer.com will deliver them within 24 hours at a price guaranteed to be identical to the prices charged in the company's stores.
The company has projected revenue and cost related to this business for the next seven years as follows:
The business will require an initial investment in delivery trucks and other equipment of $500,000. The trucks and equipment will be depreciated over a seven-year life using straight-line depreciation with a residual value of $80,000.
Required:
Assume that Super Fresh has decided to limit its analysis to seven years. Calculate the net present value of the new business using a 14 percent required rate of return. Should Super Fresh make the investment in the new business?