You have scouted a possible location in the Shire that looks promising. You would like to...

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You have scouted a possible location in the Shire that looks promising. You would like to park your truck there, knowing that a similar food truck was set up near Brighton-Le-Sands with equipment costs of $300,000, should you invest in this venture based on the following information? • Project life: 10 years (assume it takes less than 1 month to set-up and therefore does not affect the operations) • Working capital (stock take) of $45,000 is required Taxation rate for this type of businesses = 30% (payable on the same year's taxable income) Rent for your spot is $2,000/week Depreciation is straight line over the course of the project life. Assume a real discount rate of 5% • • • • Assume an annual inflation rate of 3% • Weekly operations of 7 days You expect to sell the following items. Their respective production costs and selling prices for the first year are as in the table, and each successive year they will be adjusted according to inflation: Production Sales@ 100% capacity (unit/day) Unit production cost (5/unit) Unit selling price (S/unit) Chimichangas 100 3.00 6.50 Tacos Dorados 300 1.50 3.00 Tamales 50 2.50 5.50 Other operation costs for your truck include yearly water charges of $1,700, weekly fuel usage of $200, yearly labour cost of $70,000 and insurance cost of $13,000/yr. You expect to operate at 60% of full capacity in Year 1, building up to 80% in Year 2, and then at full capacity from Year 3 onwards. Part 1 - 7 marks 1) What are the yearly fixed and variable operations costs? (Year 1, 2 and 3) 2) What is the yearly depreciation for the fixed equipment? 3) Calculate the (undiscounted) nominal net cash flow for this project. 4) Calculate the nominal discounted cash flow. Is this a worthwhile project? Should you take on this venture? Why why not? Which economic indicator have you used to justify this? Why did you select it? Part 2 - 3 mark Bad news! Your Mexican chef is demanding higher wages to send to his extended family because of the economic downturn after the pandemic. This means labour costs have gone up to $100,000 per year. How does this change the analysis? What components have changed and how? Should you still take on this venture? Part 3 - 3 mark More bad news for the food truck business: on top of your chef's higher wage, now health regulations mean you need to comply with stricter cleaning and source all your produce from approved suppliers, so you cannot finance all the capital/investment from equity. Your equipment costs increased to $400,000 and your working capital also went up to $60,000, so you will need to borrow $115,000 from the bank at a nominal interest rate of 12% (p.a.) over the 10-year project life. Is this project still worth investing in? (For simplicity, assume that interest is paid yearly) Part 4 -3 mark To overcome some of the stiff competition in the Sydney Food Truck scene, you have found another location at a nearby suburb. Rent here is also much cheaper at $600/week. BUT customers are a bit weary of foreign food they have never tried. The expected production/sales of the items have changed to: Chimichangas Production Sales (unit/day) 75 Tacos Dorados 30 Tamales 150 What are the prospects of the project now? (Note: you still need to borrow money and pay higher wages as in part 3) You have scouted a possible location in the Shire that looks promising. You would like to park your truck there, knowing that a similar food truck was set up near Brighton-Le-Sands with equipment costs of $300,000, should you invest in this venture based on the following information? • Project life: 10 years (assume it takes less than 1 month to set-up and therefore does not affect the operations) • Working capital (stock take) of $45,000 is required Taxation rate for this type of businesses = 30% (payable on the same year's taxable income) Rent for your spot is $2,000/week Depreciation is straight line over the course of the project life. Assume a real discount rate of 5% • • • • Assume an annual inflation rate of 3% • Weekly operations of 7 days You expect to sell the following items. Their respective production costs and selling prices for the first year are as in the table, and each successive year they will be adjusted according to inflation: Production Sales@ 100% capacity (unit/day) Unit production cost (5/unit) Unit selling price (S/unit) Chimichangas 100 3.00 6.50 Tacos Dorados 300 1.50 3.00 Tamales 50 2.50 5.50 Other operation costs for your truck include yearly water charges of $1,700, weekly fuel usage of $200, yearly labour cost of $70,000 and insurance cost of $13,000/yr. You expect to operate at 60% of full capacity in Year 1, building up to 80% in Year 2, and then at full capacity from Year 3 onwards. Part 1 - 7 marks 1) What are the yearly fixed and variable operations costs? (Year 1, 2 and 3) 2) What is the yearly depreciation for the fixed equipment? 3) Calculate the (undiscounted) nominal net cash flow for this project. 4) Calculate the nominal discounted cash flow. Is this a worthwhile project? Should you take on this venture? Why why not? Which economic indicator have you used to justify this? Why did you select it? Part 2 - 3 mark Bad news! Your Mexican chef is demanding higher wages to send to his extended family because of the economic downturn after the pandemic. This means labour costs have gone up to $100,000 per year. How does this change the analysis? What components have changed and how? Should you still take on this venture? Part 3 - 3 mark More bad news for the food truck business: on top of your chef's higher wage, now health regulations mean you need to comply with stricter cleaning and source all your produce from approved suppliers, so you cannot finance all the capital/investment from equity. Your equipment costs increased to $400,000 and your working capital also went up to $60,000, so you will need to borrow $115,000 from the bank at a nominal interest rate of 12% (p.a.) over the 10-year project life. Is this project still worth investing in? (For simplicity, assume that interest is paid yearly) Part 4 -3 mark To overcome some of the stiff competition in the Sydney Food Truck scene, you have found another location at a nearby suburb. Rent here is also much cheaper at $600/week. BUT customers are a bit weary of foreign food they have never tried. The expected production/sales of the items have changed to: Chimichangas Production Sales (unit/day) 75 Tacos Dorados 30 Tamales 150 What are the prospects of the project now? (Note: you still need to borrow money and pay higher wages as in part 3)

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Part 1 Initial Analysis 1 Yearly fixed and variable operation costs Year 1 2 and 3 Year 1 Fixed Cost... View the full answer