Question

10.7

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 ​$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 $2,300,000. It will be depreciated using​ MACRS,

MACRS Fixed Annual Expense Percentages by Recovery Class Click on this icon to download the data from this table Year 10-Year 10.00% 1 2 3-Year 33.33% 44.45% 14.81% 7.41% 18.00% 3 5-Year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 4 7-Year 14.29% 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% 4.45% 5 6 7 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.55% 6.55% 3.28% 8 9 10 11

​, and has a​seven-year MACRS life classification. Fixed costs will be ​$360,000 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 ​$140,000 at the end of the​ ten-year project and the cost of capital for this project is 7​%.

(12 part answer)

Answer 1

J B20 =NPV(7%, C18:L18) +B18 А B с D E F G H 1 K L 1 Year 0 1 2 3 4 5 5 61 7 8 9 10 2. 3 Initial cash outflow (Cost) -2300000 4 5 Sales (Units) 35000 364001 37856 39370.24 40945.0496 42582.85158 44286.16565 46057.61227 47899.92 49815.91 6 Growth 4% 4% 4% 4% 4% 4% 4% 4% 4% 7 sale price 40 40.8 41.616 42.44832 43.2972864 44.16323213 45.04649677| 45.94742671| 46.86638 47.8037 8 Total Revenue 1400000 1485120 1575415.296 1671200.546 1772809.539 1880596.359 1994936.618 2116228.764 2244895 2381385 9 Less: Production costs@55% of sales 770000 816816 866478.4128 919160.3003 975045.2466 1034327.998 1097215.14 1163925.82 1234693 1309762 10 Less : fixed costs 360000 360000 360000 360000 360000 360000 360000 360000 360000 360000 11 Less : depreciation 328670 563270 402270 287270 205390 205390 205390 102350 0 0 12 EBT -58670 -254966 -53333.1168) 104770.2457 232374.2926 280878.3616 332331.478 489952.9439 650203 711623.3 13 less : tax@30% -17601 -76489.8 -15999.93504 31431.07371 69712.28779 84263.50849 99699.4434 146985.8832 195060.9 213487 14 EAT -41069 -178476.2 -37333.18176) 73339.17199 162662.0048 196614.8531 232632.0346 342967.0607 455142.1 498136.3 15 Add : Depreciation 328670 563270 402270 287270 205390 205390 205390 102350 0 0 16 Operating cash flow 287601.00 384793.80 364936.82 360609.17 368052.00 402004.85 438022.03 445317.06 455142.07 498136.31 Add: after tax salvage value(Terminal 17 cash flow) 98000 18 Net cash flow -2300000 287601 384793.8 364936.8182 360609.172 368052.0048 402004.8531 438022.0346 445317.0607 455142.1 596136.3 19 20 NPV 490742.051

Terminal cash flow = 140000*(1-30%) = 98,000

Growth in sale price = 2%

Since NPV is Positive Project can be accepted

(Formula for NPV can be seen in formula bar. in case of any further expalantion please comment)