Question

7. NPV. Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales quantity of 35,000, with an annu. growth rate of 4.00% over the next ten years. The sales price per unit will start at $44.00 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 $2,400,000. It will be depreciated using MACRS, 1, and has a seven-year MACRS life classification Fixed costs will be $340,000 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 $130,000 at the end of the ten-year project and the cost of capital for this project is 8%. 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.) What is the operating cash flow for this project in year 5? (Round to the nearest dollar.)

Answer 1

Miglietti	0	1	2	3	4	5	6	7	8	9	10
Quantity		35,000	36,400	37,856	39,370	40,945	42,583	44,286	46,058	47,900	49,816
Price		$        44.00	$        44.88	$        45.78	$         46.69	$         47.63	$         48.58	$         49.55	$         50.54	$         51.55	$         52.58
MACRS %		14.29%	24.49%	17.49%	12.49%	8.93%	8.93%	8.93%	4.45%
Investment	$ (2,400,000)
Salvage											$     130,000
Sales		$ 1,540,000	$ 1,633,632	$ 1,732,957	$ 1,838,321	$ 1,950,090	$ 2,068,656	$ 2,194,430	$ 2,327,852	$ 2,469,385	$ 2,619,524
VC		$ (847,000)	$ (898,498)	$ (953,126)	$(1,011,076)	$(1,072,550)	$(1,137,761)	$(1,206,937)	$(1,280,318)	$(1,358,162)	$(1,440,738)
FC		$ (340,000)	$ (330,000)	$ (330,000)	$    (330,000)	$    (330,000)	$    (330,000)	$    (330,000)	$    (330,000)	$    (330,000)	$    (330,000)
Depreciation		$ (342,960)	$ (587,760)	$ (419,760)	$    (299,760)	$    (214,320)	$    (214,320)	$    (214,320)	$    (106,800)	$                -	$                -
EBT		$      10,040	$ (182,626)	$      30,071	$     197,484	$     333,221	$     386,575	$     443,174	$     610,733	$     781,223	$     848,786
Tax (30%)		$       (3,012)	$      54,788	$       (9,021)	$      (59,245)	$      (99,966)	$    (115,973)	$    (132,952)	$    (183,220)	$    (234,367)	$    (254,636)
Profits		$        7,028	$ (127,838)	$      21,049	$     138,239	$     233,255	$     270,603	$     310,222	$     427,513	$     546,856	$     594,150
Cash Flows	$ (2,400,000)	$    349,988	$    459,922	$    440,809	$     437,999	$     447,575	$     484,923	$     524,542	$     534,313	$     546,856	$     685,150
NPV	$ 786,097.33

Sales = Quantity x Price

Depreciation = Investment x MACRS %

Operating Cash Flow = Profits + Depreciation

Cash Flows = Operating Cash Flows + Investment + Salvage x (1 - tax)

In year 10, OCF = Profits = 594,150

NPV can be calculated using the same function in excel or calculator with 8% discount rate.