Question

Please, i need help to solve it as possible with explanation.

You next walk along Richmond Road towands the disab l inking about Tribe Athletics. You games, but the concessions at Tribe Athletics leaves something to be desired. You have a strong entrep think that you could make money starting s something to be desired. You have a strong entrepreneurial spirit and food (e... TWOMP Tacos) and beverages (.e. Tribe Bubble Tea). ting your own alternative concessions service that offers William and Mary-thuc You paid $20,000 for a business plan last siness plan last year from a local firm. You revise the plan and quickly develop the following fouyer proposal. Your concession stand would require an immediate investment of S300,000 for equipment 100 estimate that your stand would generate $90.000 in revenues in the each year. Your annual operating costs are e to be 10% of your sales. You need $10.000 in working antal immediately, but you expect to recoup all of my Your equipment can be depreciated straight line to its salvage value of $50.000 over 4 years. The relevant corpora rate is 30%. Your required return is 2.5%. A. (5 pts) Using a discounted cash flow analysis, decide if you should undertake this business venture.

Answer 1

Particulars Year 2 Year 1 Year 3 Year 4 Revenue (A) 90,000 90,000 90,000 90,000 Less. Annual Operating Costs Depreciation Total Cost (B) 9,000 9,000 9,000 9,000 62,500 62,500 71,500 62,500 62,500 71,500 71,500 71,500 Profit before tax (C)(A-B) Less. Tax @ 30% ( D) 18,500 18,500 18,500 18,500 5,550 5,550 5,550 5,550 Profit after tax (E)(C-D) 12,950 62,500 12,950 12,950 12,950 Depreciation (F) Capital Expenditure (G) Change in Working Capital (H) Salvage Value () Net Cash Flows (E+F-G-H+I) 62,500 62,500 62,500 -3,00,000 -10,000 10,000 50,000 51800 -2,34,550 75,450 75,450 1,35,450 3.762 PVF Table (For 4 Years) Discount Rate@ 2.5% 0.976 0.952 0.929 0.906 71,814 70,063 1,22,711 35759 Total DCF -2,28,829 As the resultant figure is positive $35759, We will undertake this venture. Note - We havn't considered past $20000 cost incurred a year before, as make any impact on decision Note - Depreciation would be Original Cost less Salvage Value divided by Useful Life, $300000 less $50000 divided by 4 Yearr, Depreciation would be $62500 will not Equivalent Annual Annuity is equals to Net Present Value divided by (1 (1 r%)A-n)r% Option 1- Concession Venture =35759/(1-(1+0.025)^-4)/0.025 OR 35759/3.762 9,505 Option 2 - JOB working at SWEM EAA is (5000*3.762)/3.762 5000 Option 1 is better, as it has better EAA over Option 2