Question

9. Please rework the prior problem to determine what annual sales volume is needed to generate a net present value of $0? To do this you will need to review the problem in the book and its excel answer. I will repeat the instructions here. You will need to calculate the net present value in the traditional way. You must make sure that the second year sales references the first year ( plus “first year” in the formula). You will then do a goal seek to solve this problem The goal seek function is accessed by clicking on the DATA tab -- then clicking on the “what if” box -- then clicking on the goal seek box. To use this function, you will set the “npv” cell to zero by changing the first years sales cell. There are videos that illustrate how to do a goal seek on the internet. If you cannot figure this out, you may email me a phone number where you can be reached during the day (and one during the evening – I will not call after 9:00pm your time). This offer is only good in the continental US -- sorry 8. Bob’s Submarine Sandwiches expects annual sales of $180,000, annual fixed cash outlays are $51,750 a year at each location, variable cash outlays are 35 percent of sales, depreciation is $14,000 per year, and taxes are 28% (of pretax income). Opening promotion and other costs require an initial outlay of $66,000. The company does its analysis based on a 8-year store life. Bob believes the business can be sold for $110,000 after taxes (disposal value) at the end of its 8 year lifer. Using a 9% required return, what is the net present value of this venture?

Answer 1

(i)                  Initial Cash Outflow = $ 66000

(ii)                Calculation of Free cash Inflows :

PARTICULARS	AMOUNT($)
SALE	180000
Less: Variable Cash Outlay (35% of Sales)	63000
Less: Fixed Cost	51750
Less: Depreciation	14000
Profit Before Tax	51250
Less: Tax @28%	14350
Profit After tax	36900
Add: Depreciation (Non Cash Cost)	14000
Free Cash Inflows	50900

(iii)               Cash Inflow at the End of Year – 8 = $110000

(iv)              Calculation of Net Present Value :

YEAR	CASH FLOW ($)	DISCOUNTING FACTOR @9%	DISCOUNTED CASH FLOWS ($)
0	(66000)	1	(66000)
1 TO 8	50900	5.5348	281721
8	110000	0.5018	55198
NET PRESENT VALUE			270919