Question

Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales quantity of 32,000, with an annual growth rate of 4.00% over the next ten years. The sales price per unit will start at $43 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 $2,400,000. It will be depreciated using MACRS, and has a seven-year MACRS life classification. Fixed costs will be $360,000 per year. Miglietti Restaurants has a tax rate of 40%. What is the operating cash flow for this project over these ten years? Find the NPV if the manufacturing equipment can be sold for $160,000 at the end of the ten-year project and the cost of capital for this project is 7%.

Answer 1

Tax rate		40%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Year-9	Year-10
Cost		$        2,400,000	$       2,400,000	$        2,400,000	$        2,400,000	$       2,400,000	$        2,400,000	$ 2,400,000	$ 2,400,000	$ 2,400,000	$ 2,400,000
Dep Rate		14.29%	24.49%	17.49%	12.49%	8.93%	8.92%	8.93%	4.46%
Depreciation		$           342,960	$          587,760	$           419,760	$           299,760	$           214,320	$           214,080	$     214,320	$    107,040	$               -	$                -
Calculation of after-tax salvage value
Cost of machine			$       2,400,000
Depreciation			$       2,400,000
WDV			$                     -
Sale price			$          160,000
Profit/(Loss)			$          160,000
Tax			$             64,000
Sale price after-tax			$             96,000
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Year-9	Year-10
Units		32,000	33,280	34,611	35,996	37,435	38,933	40,490	42,110	43,794	45,546
Sale price		$               43.00	$               43.86	$               44.74	$               45.63	$               46.54	$               47.48	$         48.42	$        49.39	$        50.38	$         51.39
Sale		$        1,376,000	$       1,459,661	$        1,548,408	$        1,642,551	$       1,742,419	$        1,848,358	$ 1,960,738	$ 2,079,951	$ 2,206,412	$ 2,340,561
Less: Operating Cost-55%		$           756,800	$          802,813	$           851,624	$           903,403	$           958,330	$        1,016,597	$ 1,078,406	$ 1,143,973	$ 1,213,526	$ 1,287,309
Contribution		$           619,200	$          656,847	$           696,784	$           739,148	$          784,088	$           831,761	$     882,332	$    935,978	$    992,885	$ 1,053,253
Less: Fixed cost		$           360,000	$          360,000	$           360,000	$           360,000	$           360,000	$           360,000	$     360,000	$    360,000	$    360,000	$     360,000
Less: Depreciation		$           342,960	$          587,760	$           419,760	$           299,760	$           214,320	$           214,080	$     214,320	$    107,040	$               -	$                -
Profit before tax		$           (83,760)	$        (290,913)	$           (82,976)	$             79,388	$          209,768	$           257,681	$     308,012	$    468,938	$    632,885	$     693,253
Tax @ 40%		$            (33,504)	$         (116,365)	$            (33,191)	$             31,755	$             83,907	$           103,072	$     123,205	$    187,575	$    253,154	$     277,301
Profit After Tax		$           (50,256)	$        (174,548)	$           (49,786)	$             47,633	$          125,861	$           154,609	$     184,807	$    281,363	$    379,731	$     415,952
Add Depreciation		$           342,960	$          587,760	$           419,760	$           299,760	$           214,320	$           214,080	$     214,320	$    107,040	$               -	$                -
Cash Profit after-tax		$           292,704	$          413,212	$           369,974	$           347,393	$          340,181	$           368,689	$     399,127	$    388,403	$    379,731	$     415,952
Calculation of NPV
						7.00%
Year		Capital		Operating cash	Annual Cash flow	PV factor	Present values
0		$      (2,400,000)			$      (2,400,000)	1.0000	$      (2,400,000)
1				$           292,704	$           292,704	0.9346	$           273,555
2				$           413,212	$           413,212	0.8734	$           360,916
3				$           369,974	$           369,974	0.8163	$           302,009
4				$           347,393	$           347,393	0.7629	$           265,024
5				$           340,181	$           340,181	0.7130	$           242,544
6				$           368,689	$           368,689	0.6663	$           245,673
7				$           399,127	$           399,127	0.6227	$           248,556
8				$           388,403	$           388,403	0.5820	$           226,054
9				$           379,731	$           379,731	0.5439	$           206,549
10		$             96,000		$           415,952	$           511,952	0.5083	$           260,250
					Net Present Value		$           231,130