Question

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

Tax rate		28%
		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8
Sale		180,000	180,000	180,000	180,000	180,000	180,000	180,000	180,000
Less: Operating Cost		63,000	63,000	63,000	63,000	63,000	63,000	63,000	63,000
Contribution		117,000	117,000	117,000	117,000	117,000	117,000	117,000	117,000
Less: Fixed Cost		51,750	51,750	51,750	51,750	51,750	51,750	51,750	51,750
Less: Depreciation as per table given below		14,000	14,000	14,000	14,000	14,000	14,000	14,000	14,000	112,000
Profit before tax		51,250	51,250	51,250	51,250	51,250	51,250	51,250	51,250
Tax		14,350	14,350	14,350	14,350	14,350	14,350	14,350	14,350
Profit After Tax		36,900	36,900	36,900	36,900	36,900	36,900	36,900	36,900
Add Depreciation		14,000	14,000	14,000	14,000	14,000	14,000	14,000	14,000
Cash Profit After tax		50,900	50,900	50,900	50,900	50,900	50,900	50,900	50,900
Calculation of NPV
					9.00%
Year	Initial Operating cost	Captial	Operating cash	Annual Cash flow	PV factor	Present values
0	(66,000)	(112,000)		(178,000)	1.000	(178,000)
1			50,900	50,900	0.917	46,697
2			50,900	50,900	0.842	42,842
3			50,900	50,900	0.772	39,304
4			50,900	50,900	0.708	36,059
5			50,900	50,900	0.650	33,082
6			50,900	50,900	0.596	30,350
7			50,900	50,900	0.547	27,844
8	-	110,000	50,900	160,900	0.502	80,750
				Net Present Value		158,928