NPV. Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales...
NPV. Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales quantity of 33,000, with an annual growth rate of 4.00% over the next ten years. The sales price per unit will start at $40.00 and will grow at 2.00% per year. The production costs are expected to be 55% of the current year's sales price. The manufacturing equipment to aid this project will have a total cost (including installation) of$2 comma 500 comma 0002,500,000. It will be depreciated usingMACRS, LOADING... , and has a seven-year MACRS life classification. Fixed costs will be $350,000 per year. Miglietti Restaurants has a tax rate of 38%. What is the operating cash flow for this project over these ten years? Find the NPV of the project for Miglietti Restaurants if the manufacturing equipment can be sold for $140,000 at the end of the ten-year project and the cost of capital for this project is 99%.
1. What is the operating cash flow for this project in year 1?
2. What is the operating cash flow for this project in year 2?
3. What is the operating cash flow for this project in year 3?
4. What is the operating cash flow for this project in year 4?
5. What is the operating cash flow for this project in year 5?
6. What is the operating cash flow for this project in year 6?
7. What is the operating cash flow for this project in year 7?
8. What is the operating cash flow for this project in year 8?
9. What is the operating cash flow for this project in year 9?
10. What is the operating cash flow for this project in year 10?
11. What is the after-tax cash flow of the project at disposal?
12. What is the NPV of the project?
Homework Answers
Operating Cash Flow in year 1 is $287,035
Operating Cash Flow in year 2 is $406,326.42
Operating Cash Flow in year 3 is $363,579.25
Operating Cash Flow in year 4 is $341,276.24
Operating Cash Flow in year 5 is $331,185.21
Operating Cash Flow in year 6 is $362,444.31
Operating Cash Flow in year 7 is $392,617.33
Operating Cash Flow in year 8 is $382,059.09
Operating Cash Flow in year 9 is $373,535.79
Operating Cash Flow in year 10 is $409,440.37
Terminal Cash Flow in year 10 is $86,800
NPV of the Project is -$150,717.33 at 9%
NPV of the project is -$2,162,710.96 at 99%
| Calculation of NPV of the Project | |||||||||||
| Particulars | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Initial Investment | |||||||||||
| Manufacturing Equioment Cost (A) | -2500000 | ||||||||||
| Operating Cash Flows | |||||||||||
| Depreciation Rates (B) | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% | 8.92% | 8.93% | 4.46% | |||
| Sales Quantity (B) | 33000 | 34320 | 35692.8 | 37120.512 | 38605.33248 | 40149.54578 | 41755.52761 | 43425.74871 | 45162.77866 | 46969.28981 | |
|
Annual Sales D = C* $40*
(1.02)^n n=0,1,2,3,4,5,6,7,8,9 |
1320000 | 1400256 | 1485391.565 | 1575703.372 | 1671506.137 | 1773133.71 | 1880940.24 | 1995301.406 | 2116615.732 | 2245305.968 | |
| Production Costs (E = D*55%) | 726000 | 770140.8 | 816965.3606 | 866636.8546 | 919328.3753 | 975223.5405 | 1034517.132 | 1097415.773 | 1164138.652 | 1234918.283 | |
| Fixed Costs (F) | 350000 | 350000 | 350000 | 350000 | 350000 | 350000 | 350000 | 350000 | 350000 | 350000 | |
| Depreciation (G = $2,500,000 * B) | 357250 | 612250 | 437250 | 312250 | 223250 | 223000 | 223250 | 111500 | 0 | 0 | |
| Profit Before Tax (H = D-E-F-G) | -113250 | -332134.8 | -118823.7958 | 46816.51737 | 178927.7616 | 224910.1695 | 273173.1078 | 436385.6328 | 602477.0793 | 660387.6857 | |
| Tax @38% (I = H*38%) | -43035 | -126211.224 | -45153.04242 | 17790.2766 | 67992.54942 | 85465.86442 | 103805.781 | 165826.5405 | 228941.2901 | 250947.3206 | |
| Profit After Tax (J = H-I) | -70215 | -205923.576 | -73670.75342 | 29026.24077 | 110935.2122 | 139444.3051 | 169367.3269 | 270559.0923 | 373535.7892 | 409440.3651 | |
| Add back Depreciation (K = G) | 357250 | 612250 | 437250 | 312250 | 223250 | 223000 | 223250 | 111500 | 0 | 0 | |
| Net Operating Cash Flows (L = J+K) | 287035 | 406326.424 | 363579.2466 | 341276.2408 | 334185.2122 | 362444.3051 | 392617.3269 | 382059.0923 | 373535.7892 | 409440.3651 | |
| Terminal Value | |||||||||||
| Sale Value (M) | 140000 | ||||||||||
| Tax @38% (N = M*38%) | 53200 | ||||||||||
| After tax sale value (O = M-N) | 86800 | ||||||||||
| Total Cash Flows (P = A+L+O) | -2500000 | 287035 | 406326.424 | 363579.2466 | 341276.2408 | 334185.2122 | 362444.3051 | 392617.3269 | 382059.0923 |
373535.7892
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