Question

NPV.  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 4.00​% over the next ten years. The sales price per unit will start at ​$43.00 and will grow at 2.00 % 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 $360,000 per year. Miglietti Restaurants has a tax rate of 30​%. What is the operating cash flow for this project over these ten​ years? Find the NPV of the project for Miglietti Restaurants if the manufacturing equipment can be sold for $140,000 at the end of the​ ten-year project and the cost of capital for this project is 7​%.

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation - investment in working capital

profit on sale of equipment at end of year 10 = sale price - book value

book value = original cost - accumulated depreciation

the book value is zero as the equipment is fully depreciated.

NPV is calculated using NPV function in Excel

NPV is -$1,037,165

NPV is -$1,037,165