Walter Brown is looking to open a new French fries store located in the neighborhood where he resides. He has been thinking about this project for a while. He has completed the technical, legal, and economic feasibility studies in order to decide properly. The economic study presented him with the following financial forecasts:

$$ The project will last $5$ years.

$$ The price of an average package of fries should be $$6$ per unit. Under the current conditions, it is not expected that the price will change over the life of the project.

$$ The store is expected to sell $20,000$ units the first year, with an annual growth of $5\%$ in the units sold.

$$ The main variable costs are pre$-$fry potatoes, canola oil, mayo, mustard, ketchup, fries$$ containers, napkins and plastic silverware. The economic study has also found that the variable costs should be $40\%$ of the sales revenues.

$$ The main fixed costs are rent $($$$10,000/$year$),$ utilities $($$$5,000/$year$),$ and gross salaries for two part$-$time employees $($$$10,000/$year$).$ In summary, it is expected that the fixed costs will be $$25,000$ per year. It is not expected that those fixed costs will change considerably over the life of the project.

$$ The initial investment has to finance the purchase of the frying equipment, the fridge, the freezer, furniture for customers $($tables and chairs$),$ the cash register, and some long$-$term kitchen tools. It is expected that the capital expenditures should cost $$200,000.$

$$ The project has to purchase its first batch of inventory $($pre$-$fry potatoes, fries$$ containers, napkins, etc.$)$ in order to begin selling French fries as soon as the business starts to operate. At the moment of the inventory purchase $($t$=0),$ the French fries store has not generated any income, because it is not in operation yet, but still it has to pay to its providers in the short$-$term. The required initial investment in inventory $($change net operating working capital$)$ is expected to be $$20,000$ and it will be fully financed with cash.

$$ The IRS has stated that the refrigerator and freezer and other long$-$term assets should be depreciated linearly in $5$ years, that is$,20\%$ each year.

$$ The corporate income tax rate is $40\%$ of profits.

$$ The residual inventory at the year of closing the project should be sold at the same price of its purchase. Therefore, it does not generate taxable capital gains.

$$ The salvage value of the capital expenditures at the closing year is $$100,000.$ That is$,$ the market price at which the business can expect to receive for selling the fryer, refrigerator, the freezer and the furniture, at the moment of closing the project.

$$ The weighted average cost of capital $($WACC$)$ is $8\%.$

With this information, answer in the order given:

$1.$ Carefully construct the stream of Free Cash Flows$$the Free Cash Flow Table for the project. $(40\%$ of your grade$).$

$2.$ Compute NPV and IRR of the project. Would you approve this project? Explain. $(15\%$ of your grade$).$

$3.$ If you want a return of $12\%,$ would you approve this project? Justify. $(10\%$ of your grade$).$

$4.$ If you ask a bank for a loan $($with interest$)$ of $$220,000$ in order to pay for your initial investments, does it change the NPV and IRR of the project? Do be very careful, this is a conceptual question. It does not require any computations. $(10\%$ of your grade$).$

$5.$ If you own the place where the store will be located, and you have the possibility to rent it for $$25,000$ a year instead of doing the business project. Would you still approve this project? Explain. $(15\%$ of your grade$).$

$6.$ Let$$s consider the stand$-$alone risk of the project $(10\%$ of your grade$).$ Assume that you have three possible scenarios for sales. The worst scenario is that you have long recession and the units sold per year are $30\%$ less than predicted. The best scenario is that to have a long economic boom and the units sold per year are $30\%$ more than predicted. Finally, there is a base scenario in which the units sold are as predicted. The probability of having a recession is $25\%.$ The probability of having an economic boom is $25\%$ and the probability of having normal times $($base scenario$)$ is $50\%.$

$1.$ Compute the expected value of NPV$,$ the standard deviation of NPV and the coefficient of variation of NPV$.$

$2.$ If you assume a $4\%$ risk adjustment over the cost of capital $(8\%),$ do you still approve the project? Explain. If you can please give answer in excel sheet showing the table