Question

Miglietti Restaurants is looking at a project with the following forecasted​ sales: ​ first-year sales quantity of 35,000​, with an annual growth rate of 4.00​% over the next ten years. The sales price per unit will start at $44.00 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 $2,300,000. It will be depreciated using​ MACRS, and has a​seven-year MACRS life classification. Fixed costs will be ​$330,000 per year. Miglietti Restaurants has a tax rate of 40​%. 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​%.

a) What is the operating cash flow for this project in year​ 1? year 2? year 3? year 4? year 5? year 6? year 7? year 8? year 9? year 10?

b) What is the after tax cash flow of the project of disposal?

c) What is the NPV of the project?

Answer 1

First of all lets us calculate Depreciation

Year	Opening balance	Depreciation rate	Depreciation = 2300000*Depreciation rates	Closing balance
1	2,300,000	14.29%	328670	1,971,330
2	1,971,330	24.49%	563270	1,408,060
3	1,408,060	17.49%	402270	1,005,790
4	1,005,790	12.49%	287270	718,520
5	718,520	8.93%	205390	513,130
6	513,130	8.92%	205160	307,970
7	307,970	8.93%	205390	102,580
8	102,580	4.46%	102580	0

a) Statement showing Annual operating cash flow

Particulars	1	2	3	4	5	6	7	8	9	10
Purchase of Machine
Sales Quantity	35000	36400	37856	39370	40945	42583	44286	46058	47900	49816
Sales price per unit	44	44.88	45.78	46.69	47.63	48.58	49.55	50.54	51.55	52.58
Total sales(Sales quantity*sales price per unit)	1540000	1633632	1732957	1838321	1950090	2068656	2194430	2327852	2469385	2619524
Production cost (55% of total sales)	847000	898498	953126	1011076	1072550	1137761	1206937	1280318	1358162	1440738
Fixed cost	330000	330000	330000	330000	330000	330000	330000	330000	330000	330000
Depreciation	328670	563270	402270	287270	205390	205160	205390	102580
PBT ( Sales - production cost- fixed cost- depreciation)	34330	-158136	47561	209974	342151	395735	452104	614953	781223	848786
Tax @ 40%	13732	-63254	19024	83990	136860	158294	180841	245981	312489	339514
PAT( PBT - Tax)	20598	-94881	28536	125985	205290	237441	271262	368972	468734	509271
Add: Depreciation	328670	563270	402270	287270	205390	205160	205390	102580	0	0
Annual operating cash flow	349268	468389	430806	413255	410680	442601	476652	471552	468734	509271

b) After tax cash flow of machine at disposal

= Selling price - Tax*(Selling price - Book value)

=140,000 - 40%(140,000-0)

=140.000-56000

=84000$

C) Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	NPV
Purchase of Machine	-2,300,000
Sales Quantity		35000	36400	37856	39370	40945	42583	44286	46058	47900	49816
Sales price per unit		44	44.88	45.78	46.69	47.63	48.58	49.55	50.54	51.55	52.58
Total sales(Sales quantity*sales price per unit)		1540000	1633632	1732957	1838321	1950090	2068656	2194430	2327852	2469385	2619524
Production cost (55% of total sales)		847000	898498	953126	1011076	1072550	1137761	1206937	1280318	1358162	1440738
Fixed cost		330000	330000	330000	330000	330000	330000	330000	330000	330000	330000
Depreciation		328670	563270	402270	287270	205390	205160	205390	102580
PBT ( Sales - production cost- fixed cost- depreciation)		34330	-158136	47561	209974	342151	395735	452104	614953	781223	848786
Tax @ 40%		13732	-63254	19024	83990	136860	158294	180841	245981	312489	339514
PAT( PBT - Tax)		20598	-94881	28536	125985	205290	237441	271262	368972	468734	509271
Add: Depreciation		328670	563270	402270	287270	205390	205160	205390	102580	0	0
Annual operating cash flow		349268	468389	430806	413255	410680	442601	476652	471552	468734	509271
Salvage value (140000*0.6)											84000
Total cash flow	-2,300,000	349268	468389	430806	413255	410680	442601	476652	471552	468734	593271
PVIF @ 7%	1	0.9346	0.8734	0.8163	0.7629	0.7130	0.6663	0.6227	0.5820	0.5439	0.5083
PV	-2300000	326419	409109	351666	315270	292809	294924	296835	274448	254960	301589	818029