Question

Recently, Austin Hansen was laid off from his job of 25 years. He and his wife, Anne, decided to purchase and operate a food truck, serving burgers, fries, and soft drinks near OSU campus. They decided the call their food truck, Hungry Hansen Hamburgers!   

The Hansens were able to find a truck that costs $60,000. However, the truck will require an additional $20,000 for the wrap and equipment. The truck has an expected life of six years and will be depreciated using a five-year MACRS life. The expected salvage value for the truck at the end of its useful life is $20,000. Additionally, the Hansens will need to make an initial investment of $2,000 for product inventory (e.g., meat, hamburger buns, etc.), which will be recovered at the end of the life of the project.

During the first year of operation, revenues are expected to be $60,000, increasing to $120,000 per year for years 2-6. Permits and licenses are expected to be $500 per year. Fuel and power are expected to be $300 per month and the cost of materials is expected to be 40% of revenue. The tax rate is 25% and the cost of capital (discount rate) is 15%.

Calculate the project’s annual free cash flows over the expected life of the equipment.

Answer 1

The cash flows every year are marked bold in the picture. Formulas are also mentioned in the excel for your purpose. Ensure that while calculating cash flows tax rate is considered,. MACRS depreciation rates have been given which can also be verified from other sources

Initial outlay Truck 60000 Makeove 20000 total Woin 80000 2000 Yearly operating cash flows Year 2 Year 1 Revenue (S) 60000 Revenue (S) 120000 (-]licence fee 500 licence fee 3600 fuel 24000 cost of material 28100 Total costC 12000 depreciation(D) 25% TaHrate(T) 500 fuel 3600 48000 52100 19200 cost of material Total costC depreciation(D) TaHrate(T) Calculation of depreciation Using MACRS method for the same period we get the depreciation rates as 25% 55725 cashflow (S-C-D(1-T)+D) 26925 cashflow (S-C-D(1-T+D) Given Year 3 Revenue (S) 20% Year 1 Year 4 Initial cost: 80000 32 Year 2 120000 120000 Revenue (S) Salvage value useful life 20000 500 licence fee 6 years (-licence fee 500 19.20% Year 3 11.52% Year 4 fuel 3600 fuel 3600 depreciated value 60000 48000 cost of material 52100 Total cost C 11520 depreciation(D) 25% TaratelT) cost of material 48000 11.52% Year 5 52100 5.76 Year 6 Total cost C depreciation(D) TaHrate(T) 6912 Terminal year oash flow 25% 52653 20000 cashflow (S-C-D(1-T+D) 53805 cashflow (S-C-D(1-T)+D) Salvage value Year 5 Revenue (S) Year 6 120000 Revenue (S) 2000 Terminal cash flow (salvage 22000 WC investment 120000 (licence fee 500 licence fee 500 3600 fuel fuel 3600 48000 cost of material 48000 cost of material 52100 Total cost C 6912 depreciation(D) 25% Taxrate(T) 52653 cashflow (S-C-D(1-T)+D) 52100 Total cost C depreciation(D) TaHrate(T) 3456 25% cashflow (S-C-D(1-T)+D) 51789