An Investment Decision
“What’s the fuss about? It’s only a greasy spoon!”
That summed it up, thought Emma. Her accountant boyfriend Leon simply didn’t understand her business. When she bought the Swan Café two years ago, it was so run down that the lease cost just £4,000. And it was now a thriving business. Close to the river in Oxford, it had a great trade from builders between 7 and 9.00, from students from 9.00 till 1.00 and from tourists between 1.00 and 4.30. Then students drifted back between 4.30 and 5.30. In the first week after reopening the café, revenue was just £800 which, after costs, left Emma with just £21 for herself. Today, weekly takings were as high as £5,600 and customers were queuing to get in. Weekly profits often reached £1,500 allowing a healthy cash nest-egg to build up at the bank.
Now Emma wanted to buy the shop next door, available for £140,000 freehold. This would allow her to expand the seating area and also extend the size of the kitchen and the range of food offered. Her younger sister (Natalia) had carried out customer research at the cafe as part of her Business Studies coursework. It showed that customers loved Emma’s warm personality and the good food, but quite a few wanted more. The tourists were looking for freshly baked scones and cakes, while the University students would love a roast dinner in the early evening.
Natalia promised to extrapolate recent monthly sales forward for the next few months, to provide Emma with an idea about how much profit the business should make (the figures from Appendix A form Figure 1).
Emma asked Natalia to provide a further extrapolation to cover the next 4 years. She could then use it as a benchmark for judging sales after buying the shop next door. Would the investment of £140,000 be worthwhile? (In fact, the total investment would be £160,000, including the cost of decoration and equipment.)
While Natalia worked on the sales figures, Emma worked on...
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