Question

same question just three pictures so they are not blurry

7. NPV. Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales quantity of 35,000, with an annual growth rate of 4.00% over the next ten years. The sales price per unit will start at $42.00 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 $2,500,000. It will be depreciated using MACRS, 1, and has a seven-year MACRS life classification. Fixed costs will be $330,000 per year. Miglietti Restaurants has a tax rate of 30%. 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 $160,000 at the end of the ten-year project and the cost of capital for this project is 9%. What is the operating cash flow for this project in year 1? (Round to the nearest dollar.) What is the operating cash flow for this project in year 2? (Round to the nearest dollar.) What is the operating cash flow for this project in year 3? (Round to the nearest dollar.) What is the operating cash flow for this project in year 4? (Round to the nearest dollar.)

Answer 1

	Initial	1	2	3	4	5	6	7	8	9	10
No. Of units Sold	( increase by 4 % )	35,000	36,400	37,856	39,370	40,945	42,583	44,286	46,058	47,900	49,816
selling cost	(Increase by 2%)	42	42.84	43.70	44.57	45.46	46.37	47.30	48.24	49.21	50.19
Initial investment- Cost of machinery	$                        -2,500,000
Sales	(no. of units * selling cost)	$   1,470,000	$   1,559,376	$   1,654,186	$   1,754,761	$   1,861,450	$   1,974,626	$   2,094,683	$   2,222,040	$   2,357,140	$   2,500,454
-variable Cost	(55% * of sales )	$     -808,500	$     -857,657	$     -909,802	$     -965,118	$ -1,023,798	$ -1,086,044	$ -1,152,076	$ -1,222,122	$ -1,296,427	$ -1,375,250
- Fixed cost	Given	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000	$     -330,000
-depreciation	= cost of machinery* 7 years depreciation rate	$     -357,250	$     -612,250	$     -437,250	$     -312,250	$     -223,250	$     -223,250	$     -223,250	$     -111,250	$                   -	$                   -
EBIT		$        -25,750	$     -240,531	$        -22,866	$       147,392	$       284,403	$       335,332	$       389,358	$       558,668	$       730,713	$       795,204
- Income tax 30%	EBIT* 30%	$            7,725	$         72,159	$          6,860	$        -44,218	$        -85,321	$     -100,600	$     -116,807	$     -167,600	$     -219,214	$     -238,561
PAT		$        -18,025	$     -168,372	$        -16,006	$       103,175	$       199,082	$       234,732	$       272,550	$       391,068	$       511,499	$       556,643
+dep.		$       357,250	$       612,250	$       437,250	$       312,250	$       223,250	$       223,250	$       223,250	$       111,250	$                   -	$                   -
+ sales of asset						$       500,000	$                   -	$                   -	$                   -	$                   -	$       160,000
Operating cash flow		$       339,225	$       443,878	$       421,244	$       415,425	$       922,332	$       457,982	$       495,800	$       502,318	$       511,499	$       716,643
Discount factor (1/(1+r%)^n	for r= 9% 1/(1+9%)^n	1/(1+9%)^1	1/(1+9%)^2	1/(1+9%)^3	1/(1+9%)^4	1/(1+9%)^5	1/(1+9%)^6	1/(1+9%)^7	1/(1+9%)^8	1/(1+9%)^9	1/(1+9%)^10
DF	1.000	0.917	0.842	0.772	0.708	0.650	0.596	0.547	0.502	0.460	0.422
Discounted cash flow (DF*cash flow)	$     -2,500,000	$ 311,215.60	$ 373,603.60	$ 325,277.36	$ 294,297.25	$ 599,452.36	$ 273,079.85	$ 271,219.74	$ 252,096.30	$ 235,508.43	$ 302,717.80

So the NPV= sum of all the present value of cash inflow- initial cost

$(311215.60+ 373603.60+ 325277.36+294297.25+ 599452+ 273079+ 270219+ 252096+ 235508+ 302717) - 2500000

$ 738,468.27

• The sold units have increased by 4% .So for the second year , sales unit-= 35000*104% = 36400 . For 3^rd year = 36400*104% = 37856 and so on
• The sales rice has increased by 2 %. So for the second year = 42*102%= 42.84 and so on
• Depreciation is as per the 7 year rates , for 1^st year = 2500000*14.29% , for second year = 2500000*24.49% and so on
• Operating cash flow= net profit + depreciation
• Present value = discount factor* cash flow
• the asst is sold in the 10th year and so it is added back