8. You have determined in your mind that you would like to have a business of your own,

although your father runs a family restaurant in your local city. You have therefore, decided

to have a medium size snack and cocktails bar which will accommodate the cruise ship

passengers who visit your city. You plan to keep the business for five years after which you

will sell it off to your brother John for $2,000,000 and go off to do your Masters Degree in

the UK. Since you will be occupying the establishment from your grandmother for free, you

have decided that you need to make some improvements to the property which will cost you

$1,500,000. Additionally you will spend $275,000 in bar stools, tables and decorations. The

Leasing of such a space in the area would cost $75,000 per year. You will depreciate the

assets over 7 years using MACRS. You have determined that you would need an average cash

balance of $15,000 and inventory of $20,000 while Accounts payable should average $10,000.

You plan to borrow the money from a local bank and pay interest at a rate of 15 percent. To

increase your chances of success at the business you plan to have your cousin Johnathan to

conduct a market survey which will cost you $100,000. Your new venture will decrease the

revenue your family business will earn by $15,000 per year and you have agreed to allow your

father to take this amount from your allowance as a shareholder of the family restaurant.

Revenues are projected to be $500,000 the first year and is expected to increase by 20% the

second year, 15% the third year and to continue to increase at 10% thereafter. Fixed annual

operating costs are expected to be salaries of $110,000, Utilities $75,000, Food and Liquor

License is 15% of revenues and Taxes are 40% of net revenues.

Required:

A. Calculate the initial outlay of the project. (1 POINTS)

B. Calculate the annual after-tax operating cash flow for Years 1 -5. (3 POINTS)

C. Determine the terminal year (in year 5) after-tax non-operating cash flow. (2 POINTS)

D. What is the project NPV? (2 POINTS)

E. What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR criterion? Why? (2 POINTS)