Robert is considering opening a restaurant selling bagels in the newly built BHSU library. He estimates that
Question:
Robert is considering opening a restaurant selling bagels in the newly built BHSU library. He estimates that it will cost $100,000 to purchase new equipment for his restaurant business. He will run the restaurant only for 4 years. The restaurant’s equipment falls in the MACRS 5 year class, and equipment will have a salvage value of $30,000. Rent and other fixed costs will equal $10,000 per year, and variable costs will be 20% of the sales revenue. 15,000, 20,000, 25,000, and 30,000 bagels will be sold in years 1, 2, 3, and 4, at $10 each. The management will also need to immediately set aside and keep each year $2,000 in cash to cover unforeseen expenditures, and this amount will be fully recovered by the end of the project’s life. The corporate tax rate is 34% and the discount rate is 10%. (40 points)
A. Show project operating cash flow (OCF) for each year on a timeline. You must clearly show all items that are used for the computation. (6 points)
B. Show project net capital spending (NCS) for each year on a timeline. You must clearly show all items that are used for the computation. (6 points)
C. Show project change in net working capital (∆NWC) for each year on a timeline. You must clearly show all items that are used for the computation. (6 points)
D. Use the project cash flows that you estimate from a, b, and c, and find NPV.
Concepts In Federal Taxation
ISBN: 9780324379556
19th Edition
Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher