Question

Miglietti Restaurants is looking at a project with the following forecasted? sales: ? first-year sales quantity of 31,000?,

with an annual growth rate of 2.00?% over the next ten years. The sales price per unit will start at $42 and will grow at 4.50?% per year. The production

costs are expected to be 55?% of the current? year's sales price. The manufacturing equipment to aid this project will have a total cost? (including

installation) of $2,400,000.?? It will be depreciated using? MACRS, and has a? seven-year MACRS life classification. Fixed costs will be $340,000

per year. Miglietti Restaurants has a tax rate of 30?%. What is the operating cash flow for this project over these ten? years?

Answer 1

Calculation of operating cash flows over ten years
Year	1	2	3	4	5	6	7	8	9	10
Sales (in units)	31000	31620	32252	32897	33555	34227	34911	35609	36321	37048
Sales price per unit	$42.00	$43.89	$45.87	$47.93	$50.09	$52.34	$54.69	$57.16	$59.73	$62.42
Sales	$1,302,000.00	$1,387,801.80	$1,479,257.94	$1,576,741.04	$1,680,648.27	$1,791,402.99	$1,909,456.45	$2,035,289.63	$2,169,415.22	$2,312,379.68
Less : Production cost [$23.10 per unit]	$716,100.00	$730,422.00	$745,030.44	$759,931.05	$775,129.67	$790,632.26	$806,444.91	$822,573.81	$839,025.28	$855,805.79
Less : Fixed cost	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00
Less : Depreciation	$342,960.00	$587,760.00	$419,760.00	$299,760.00	$214,320.00	$214,080.00	$214,320.00	$107,040.00	$0.00	$0.00
Profit before tax	-$97,060.00	-$270,380.20	-$25,532.50	$177,049.99	$351,198.60	$446,690.73	$548,691.54	$765,675.82	$990,389.93	$1,116,573.89
less : Tax @ 30%	-$29,118.00	-$81,114.06	-$7,659.75	$53,115.00	$105,359.58	$134,007.22	$164,607.46	$229,702.75	$297,116.98	$334,972.17
Add : Depreciation	$342,960.00	$587,760.00	$419,760.00	$299,760.00	$214,320.00	$214,080.00	$214,320.00	$107,040.00	$0.00	$0.00
Operating Cash flow	$275,018.00	$398,493.86	$401,887.25	$423,694.99	$460,159.02	$526,763.51	$598,404.08	$643,013.08	$693,272.95	$781,601.72
Working
Production cost per unit = 55% of Current year sales price = 55% * $42 = $23.10
Calculation of depreciation on equipment using 7 year MACRS rates
Year	Installed cost	Depreciation rates	Depreciation
1	$2,400,000.00	14.29%	$342,960.00
2	$2,400,000.00	24.49%	$587,760.00
3	$2,400,000.00	17.49%	$419,760.00
4	$2,400,000.00	12.49%	$299,760.00
5	$2,400,000.00	8.93%	$214,320.00
6	$2,400,000.00	8.92%	$214,080.00
7	$2,400,000.00	8.93%	$214,320.00
8	$2,400,000.00	4.46%	$107,040.00