you own a restaurant that generates annual revenues of $5 million. You are considering starting a...
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you own a restaurant that generates annual revenues of $5 million. You are considering starting a service that will provide prepared meals to households and estimate that you will be able to generate annual revenues of $1 million from the service. You have come up with the following additional information: • You plan on using the existing kitchen space, but you will need to invest $500,000 in updating the facilities. This investment will be depreciated straight line over 5 years to zero. The expected market value of the facilities is $100,000 after 5 years. • You will need to hire additional kitchen staff to meet the demand. You expect your annual costs to be $200,000 for salary and related costs. • Your annual advertising costs will increase from $80,000 to $120,000, and your inventory, which is currently $100,000, will increase to $150,000 immediately (at t-0). After five years, the inventory will decrease to $100,000. • You expect the cost of the food to be 50% of revenues and you plan to run the service for the next 5 years. • Your marginal tax rate is 40%. (a) Estimate the annual free cash flow from this investment. (b) If your cost of capital is 15%, estimate the net present value of this investment. (c) How would your answer change if you were told that 20% of the revenues from the "prepared food" service represent loyal customers who would have otherwise come to the restaurant to eat? Reestimate the NPV of this investment. (You can assume that they would have spent an equivalent amount at the restaurant and that the cost of the food is the same) you own a restaurant that generates annual revenues of $5 million. You are considering starting a service that will provide prepared meals to households and estimate that you will be able to generate annual revenues of $1 million from the service. You have come up with the following additional information: • You plan on using the existing kitchen space, but you will need to invest $500,000 in updating the facilities. This investment will be depreciated straight line over 5 years to zero. The expected market value of the facilities is $100,000 after 5 years. • You will need to hire additional kitchen staff to meet the demand. You expect your annual costs to be $200,000 for salary and related costs. • Your annual advertising costs will increase from $80,000 to $120,000, and your inventory, which is currently $100,000, will increase to $150,000 immediately (at t-0). After five years, the inventory will decrease to $100,000. • You expect the cost of the food to be 50% of revenues and you plan to run the service for the next 5 years. • Your marginal tax rate is 40%. (a) Estimate the annual free cash flow from this investment. (b) If your cost of capital is 15%, estimate the net present value of this investment. (c) How would your answer change if you were told that 20% of the revenues from the "prepared food" service represent loyal customers who would have otherwise come to the restaurant to eat? Reestimate the NPV of this investment. (You can assume that they would have spent an equivalent amount at the restaurant and that the cost of the food is the same)
Expert Answer:
Answer rating: 100% (QA)
a To estimate the annual free cash flow from this investment we need to calculate the cash inflows and cash outflows associated with the prepared meals service The annual free cash flow can be determi... View the full answer
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
Posted Date:
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