I am confused about this problem. Can you please help me? I am confused if I subtract the initial costs of $880,000 ($350,000 startup cost + $500,000 machine cost + $30,000 fixed costs) or just the $350,000 startup cost from $1,600,000 amount when the business is sold in year 7.

I will really appreciate your help with this. Thank you in advance!

THE CASE: Guthrie's restaurant 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 a 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 fires, cole slaw, 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 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 considering applying for a franchise. If approved, you expect startup costs to be $350,000 in real estate costs, which are not depreciable, plus another $500,000 in equipment that is depreciable. You will be allowed to depreciate the $500,000 in equipment on a five-year MACRS schedule. The $350,000 in real estate costs is not depreciable and should be included in the book value of the fixed assets associated with the franchise when it is sold. Your plan is to start and operate the business for 7 years at which time you expect to sell the business for $1,600,000. You expect to initially have working capital needs of $30,000, but these needs will grow by $5,000 per year. You expect sales in the first year to be $200,000 and that sales will grow by 10% per year. You project annual fixed operating expenses of $50,000 in the first year. These fixed expenses will grow by $3,000 per year. Your annual variable operating expenses are expected to be 50% of sales. You expect to pay taxes of 21%. Assume your required return is 11%. Should you apply for a Guthries Franchise? Prepare a report responding to the following prompts: 1. Prepare pro forma income statements and operating cash flow projections. Explain your pro forma statements in your report. 2. Estimate the total cash flows for this opportunity. Explain your estimates in your report. 3. Estimate the opportunity's NPV. Explain how you arrived at your NPV estimates in the report. 4. Consider what happens to cash flows and NPV if Sales are 20% more than expected. What if sales are 20% less than expected? Discuss this analysis in your report. 5. What is your recommendation? Should you and your partners pursue this opportunity? Explain your recommendation and provide your rationale. THE CASE: Guthrie's restaurant 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 a 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 fires, cole slaw, 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 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 considering applying for a franchise. If approved, you expect startup costs to be $350,000 in real estate costs, which are not depreciable, plus another $500,000 in equipment that is depreciable. You will be allowed to depreciate the $500,000 in equipment on a five-year MACRS schedule. The $350,000 in real estate costs is not depreciable and should be included in the book value of the fixed assets associated with the franchise when it is sold. Your plan is to start and operate the business for 7 years at which time you expect to sell the business for $1,600,000. You expect to initially have working capital needs of $30,000, but these needs will grow by $5,000 per year. You expect sales in the first year to be $200,000 and that sales will grow by 10% per year. You project annual fixed operating expenses of $50,000 in the first year. These fixed expenses will grow by $3,000 per year. Your annual variable operating expenses are expected to be 50% of sales. You expect to pay taxes of 21%. Assume your required return is 11%. Should you apply for a Guthries Franchise? Prepare a report responding to the following prompts: 1. Prepare pro forma income statements and operating cash flow projections. Explain your pro forma statements in your report. 2. Estimate the total cash flows for this opportunity. Explain your estimates in your report. 3. Estimate the opportunity's NPV. Explain how you arrived at your NPV estimates in the report. 4. Consider what happens to cash flows and NPV if Sales are 20% more than expected. What if sales are 20% less than expected? Discuss this analysis in your report. 5. What is your recommendation? Should you and your partners pursue this opportunity? Explain your recommendation and provide your rationale