Today is 1 January 2021. Jake used $200,000 to purchase a cafe business in Sydney. To operate

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Question:

Today is 1 January 2021. Jake used $200,000 to purchase a cafe business in Sydney. To operate this business, Jake needs to pay rent, maintenance costs and labour costs. Here are the details

• Rent will be paid by the end of each month with an amount of $2,000.

• Labour cost will be paid by the end of each month with an amount of $10,000.

• Maintenance cost will be paid by the end of each quarter with an amount of $500.

• Jake predicts that this cafe franchise initially can have monthly revenue of $13,000.

Assume that Jake can obtain this amount by the end of each month. Jake forecasts that this revenue amount will increase at the rate of y% p.a. The revenue increase will only happen at the beginning of each year. For example, this cafe franchise initially has monthly revenue of $13,000 in 2021. Then the revenue amount will become $13,000(1+y%) per month in 2022 and $13, 000(1 + y%)2 per month in 2023. Jake assumes the value of y is the same as the Australian CPI rate for 2020. You need to use FactSet to find the Australian CPI rate for 2020.

• Jake plans to run this business for three year and predict that he can sell this business on 1 January 2024 with an amount of $210,000.

a. Calculate the monthly net cash flows. Assume that Jack can reinvest all profit at a rate of x% p.a. Use Goal Seek to find this reinvestment rate if Jack requires a holding period yield rate of 7.5% p.a. for this investment (from 1 January 2021 to 1 January 2024).

b. Given that Jack needs to pay tax for his profit at a rate of 20% and tax is paid by end of each quarter1, calculate the monthly net cash flows (Assume that Jack does not need to pay tax for the proceeds from selling the business.). Assume that Jack can reinvest all after-tax profit at a rate of x% p.a. Use Goal Seek to find this reinvestment rate if Jack requires a holding period yield rate of 7.5% p.a. for this investment (from 1 January 2021 to 1 January 2024).