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In: Finance

Please solve in Excel format and show step-by-step formulas Not wanting to leave his beloved alma...

Please solve in Excel format and show step-by-step formulas

Not wanting to leave his beloved alma mater, Will Anderson has come up with a scheme to stay around for 5 more years: He has decided to bid on the fast-food concession rights at the football stadium. He feels sure that a bid of $60,000 will win the concession, which gives him the right to sell food at football games for the next 5 years. He estimates that annual operating costs will be 40% of sales and annual sales will average $100,000. His Uncle Josh has agreed to lend him the $60,000 to make the bid. He will pay Josh $15,400 at the end of each year. His tax rate is 15%.

(a) Use a spreadsheet model to answer the following question. What is Will’s average annual after-tax profit? Assume that the yearly payments of $15,400 are tax deductible.

(b) Suppose that sales will probably vary plus or minus 40% from the average of $100,000 each year. Will is concerned about the minimum after-tax profit he can earn in a year. He feels that he can survive if it is at least $20,000. Model annual sales for the 5 years as five continuous uniform random variables. Based on a sample of 7,500 five-year periods (750 periods if using Excel alone), estimate the probability that over any five-year period the minimum after-tax profit for a year will be at least $20,000. Should Will bid for the concession?

Solutions

Expert Solution

Annual after tax profit
a) Sale 100000
operating cost 40000
Loan repayement 15400
Profit 44600
Tax 6690
After tax profit 37910
b) Case 1: Increase by 40%
1 2 3 4 5 Average
Sales 100000 140000 196000 274400 384160
Operating cost 40000 56000 78400 109760 153664
Loan repayment 15400 15400 15400 15400 15400
Profit 44600 68600 102200 149240 215096
Tax 6690 10290 15330 22386 32264.4
After Tax profit 37910 58310 86870 126854 182831.6 98555.12
Case 1: Decrease by 40%
1 2 3 4 5 Average
Sales 100000 60000 36000 21600 12960
Operating cost 40000 24000 14400 8640 5184
Loan repayment 15400 15400 15400 15400 15400
Profit 44600 20600 6200 -2440 -7624
Tax 6690 3090 930 -366 -1143.6
After Tax profit 37910 17510 5270 -2074 -6480.4 10427.12
In the case if there are chances of fall in sale , then will should not bid for right
As in that case will not be able to pay loan repayment.

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