Barnes & Noble
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Abstract
Barnes & Noble is seeking the opportunity to expand into online book market via the BN.com website. Our task is to determine whether the BN.com project would be profitable for the company. In order to do so, we provided the pro forma Income Statements and schedule of cash flows for a ten year period in the future, and estimated the Net Present Value (NPV) of the project. Under the current financial projections and assumptions, we calculated that the project would become profitable only after its 10th year of operation and had a projected NPV of negative $330.82 million dollars. Therefore, we believed that BN.com will have an overall negative effect on Barnes & Noble Company. And we suggest that the company quit the project. However, based on our sensitive analysis, the project would have a chance to be profitable if the cost of sales can be reduced to 96% or lower of the original projection. With the potential improvement of technology and managerial skills, we felt that it is quite possible that Barnes & Noble would find a solution to reduce costs. However, Barnes & Noble should think of starting the project only if they find the solution.

Assumptions
The cost of the excess space in the facility should be viewed as a sunk cost. It cannot be an opportunity cost since those costs are viewed with respect to the next best alternative. However, since the excess space cannot be leased for anything else, there is no next best alternative. It is a sunk cost since there is no way for the cost to be recovered. Neither the growth of bn.com nor the use by any other company is going to lease up the space.

The building should be viewed as part of the project with its cost at time 0 of the project. The fixed operating expense should be included in the incremental cash flows. Without the project, the cost of the building and fixed operating expenses would not exist. The only other reason to build a building would be to view it as a real estate investment and lease it to a tenant. However, since the space was clearly customized to meet the needs of the project, the buildings purpose is clearly tied to the project.

Sales erosion from the internet sales would be considered as a side effect. It gives people an opportunity to choose between 2 options and that will ultimately hurt the sales of the existing stores.

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Cost Of Sales And Cost Of The Excess Space. (June 21, 2021). Retrieved from https://www.freeessays.education/cost-of-sales-and-cost-of-the-excess-space-essay/