$ 3,000

$ 3,300

$ 3,630

$ 3,993

$ 4,392

Note that the working capital is fully salvaged at the end of year 5, resulting in a cash inflow of $4,392.

To compute the net present value, we will use Bookscape's cost of capital of 12.14% (from chapter 4). In doing so, we recognize that this is the cost of capital for a bookstore, and that this is an investment in a cafe. It is, however, a cafe whose good fortunes rest with how well the bookstore in doing, and whose risk is therefore, the risk associated with the bookstore. The present value of the cash inflows is less than the initial investment of $150,00, resulting in a NPV of -$86,413. This suggests that this is not a good investment, based on the cash flows it would generate.

Note though, that this analysis is based upon looking at the cafe as a stand-alone entity, and that one of the benefits of the cafe is that is that it might attract more customers to the store, and get those customers who come to buy more books. For purposes of our analysis, assume that the cafe will increase revenues at the store by $500,000 in year 1, growing at 10% a year for the following 4 years. In addition, assume that the pre-tax operating margin on these sales is 10%. The incremental cash flows from the "synergy" are shown in Table 6.9.

Table 6.9: Incremental Cash Flows from Synergy
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