In: Finance
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?
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. |