Question

QuickSalad is a new concept from an existing food company that intends to sell discounted salads. It will lease its buildings and has no capital expenses or depreciation. It will qualify for a special tax rate of 10% due to its healthy food nature. It must maintain a balance of 20% of each year’s revenues in working capital at the start of each particular year. Revenues for this first year of operations are expected to be $2 million and costs are $1 million. Revenues and costs will grow at 10% each year for the years 2, 3, 4, and 5. At year five it expects to be able to sell itself to McDonalds for $15 million and if there is any taxable gain it would pay a 20% tax rate on this. A discount rate of 8% is appropriate for valuing the cash flows of QuickSalad. Should QuickSalad start its business given these projected cash flows and discount rate? (20 points)

Answer 1

As the NPV is positive and the business doesn't require any initial investment apart from working capital and the taxes are arguably cheap. i would recommend to invest in the roject.