You work in the Finance Department of the supermarket chain Lidrose. The company is planning to expand its business by offering online orders and home delivery. The CEO and CFO need your expertise to decide whether it would be beneficial to pursue the new business project.
The project will have a lifetime of 5 years and the top management will decide after an evaluation after these 5 years if this service will be offered permanently. Lidrose plans to spend 20,000 now on advertising and 5,000 during the first year of the project.
To set up the new service, Lidrose has to invest in a fleet of delivery vans, the web portal, warehouse capacity, delivery crates etc. This initial investment would be approximately 250,000. At the end of 5 years, the delivery vans and the delivery equipment can be sold for 100,000.
The wages for the delivery drivers which have to be hired for the new service will be 85,000 per year
In the first year, Lidrose expects revenues from sales via the online/delivery service GBP 150,000, in the second year of GBP 250,000, GBP 300,000 in the years 3 and 4 and GBP 400,000 in the final year of the project.
The discount rate Lidrose uses is 6% and they usually expect projects to be paid back after 3 years.
Task
a) Please evaluate this project using the Net Present Value, Payback and Discounted Payback Period as well as the Profitability Index. Should Lidrose offer home delivery?
b) Advise the CEO and CFO of Lidrose whether it would be beneficial for the company to offer online ordering and home delivery. To do so, write a report (500 words) explaining the findings from a) and discussing the benefits and drawbacks of each of the methods used in a). Draw a conclusion of your position.
