Net cash flows and Islamic investment alternative to NPV analysis:
Safwan plans to open a store that sells Middle East food, housewares, and decorative arts in a Western city. He feels that returning travellers and former Mideastern residents who have relocated to this city will provide a growing customer base. Currently the only local competition for these goods is on the Internet, and Safwan believes that the ambience of the store, tentatively named The Olive Traders, will be an important aspect of the shopping experience.
He will finance the enterprise with

a) his and family contributions and

b) external financing known as Musharaka (see note) from the Islamic business division of One World Bank.
As in the case of conventional business loans, Safwan must make a persuasive business case to the bank. The difference, of course, is that traditional DCF methods, which involve interest that is disallowed by Islamic law, should not be used to structure the bank financing.
Consider The Olive Traders to be a partnership between Safwan (and family) and One World Bank, wherein Safwan pays to the bank a share of profits in proportion to its capital contribution that will retire the bank’s share of the partnership over a period of 10 years. He also will make an annual payment to compensate the bank for sharing the store’s risks. Assume that any store losses also are shared in proportion to capital contributions and are not accumulated, carried forward or carried back. The following table contains other relevant information for The Olive Traders.

Required:
1. Prepare a profit sharing plan that incorporates annual retirement of the bank’s share of the partnership over no more than a 10-year period.
2. Compute a schedule of planned net cash flows to Safwan and family.
3. How would you advise Safwan for his upcoming negotiations with the bank?

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Case data values Initial store investment Buildin E uipment Fixtures and d cor Inventory ar etin cost Cash reserve Saf an and family's capital contribution Ris fee paid to ne orld Ban Saf ans federal and local income tax rate Saf ans current annual livin expenses Expected chan e in cost of livin First-year sales forecasts and annual growth Food cost of sales holesale, frei ht in cost Sales price mar up over cost ouse ares cost of sales ditto Sales price mar up over cost Decorative Art, cost of sales ditto Sales price mar up over cost 100,000 350,000 30,000 40 year life, ero salva e 10 year life, ero salva e 120,000 10 year life, ero salva e 20 of first years sales 10 of next years sales 10 of next years cash operatin expenses 18,000 per year 30 of net operatin income 40,000 3 per year Year 1 Year 2 Year 3 Year 4 Year 5 Years 6-10 60,000 100 15 10 8 5 50 50 50 50 50 50 10,000 80 10 15 10 5 100 100 100 100 100 100 15,000 60 8 16 8 5 100 100 100 100 100