Guthrie’s restaurant1 was started in 1965 in Haleyville, Alabama, by Hal Guthrie. The restaurant began serving Chicken Fingers in 1978. In 1982, Hal and his oldest son Chris opened Guthrie's in Auburn, Alabama. Originally, Guthrie’s had a large menu including hamburgers, steak sandwiches, and chicken fingers. Soon after opening, however, the menu was limited to the overwhelmingly popular Chicken Finger box. The Box includes chicken fingers, French fries, coleslaw, Texas toast, and Guthrie’s Signature Sauce. During the 1980s, The Guthrie family opened Guthrie’s locations in several college towns throughout the Southeast, including Athens, Georgia, Tallahassee, Florida, and Tuscaloosa, Alabama. Hey also opened them in several towns. By the end of the 1980s, Guthrie’s was a household name throughout much of the Southeast. Now, more than 50 years since its first opening, Guthrie’s continues as a specialty restaurant with a limited menu focusing on Fried Chicken Fingers. It is still a family business, but its franchise business is steadily growing. As a result, people all over the U.S. can now enjoy Guthrie’s Golden Fried Chicken Fingers.

You and your business partners are looking for an investor to help you buy a franchise. If approved, you expect startup costs to be $700,000 in equipment that is depreciable to zero on a five-year MACRS schedule. Your plan is to start and operate the business for 7 years at the end of which time you expect to sell the business for $950,000. You expect to have initial working capital needs of $30,000, but these needs will remain proportionate to sales (they will grow at the same rate as sales grow). You expect sales in the first year to be $250,000 and that sales will grow by 10% per year. You project annual fixed operating expenses of $70,000 in the first year. These fixed expenses will grow by 8% per year. Your annual variable operating expenses are expected to be 40% of sales. You expect to pay taxes of 21%. Assume your required return is 14%. Convince me to fund you in this business venture.

(the sales in year 2 will be 10% higher than the sales in year 1. The sales in year 3 will be 10% higher than the sales in year 2, etc.)

1) a. Explain why this business venture makes financial sense

b. What is the minimum business sales price at the end that still makes this proposal worthwhile?

c. Will the project be worthwhile if the variable costs are 50% of sales, rather than 40%?

2) Use a spreadsheet to calculate your pro forma projections. a. Income statements b. MACRS Depreciation Schedule c. Operating cash flow projections d. Total cash flows from assets projections e. Net present value estimates f. Alternate business pricing g. Analysis for change in variable costs this is all that's given