John is considering opening a hotdog stand on Michigan Avenue. John's market research shows that the clientele is young professionals, typically without children, who like the traditional aspect of eating hotdogs, but also relish his gourmet, specially manufactured low-fat hotdogs and the healthy side dishes his stand also sells. John's overall plan is to get the stand up and running for five years, and then sell the stand off to a new owner and retire to Florida. 1. John estimates that the cost of starting up a stand will be as follows: Purchase of retail kiosk (mobile retail food outlet) $500,000 Specialized kitchen equipment $50,000 Installation of the kitchen equipment $10,000 Furniture and fittings $50,000 . . . 2. John estimates that annual operating costs for his stand as follows: Kitchen and service staff (5 people)- total of $200,000 per year License and rent costs $150,000 Raw materials: - Hotdogs- $2 per hotdog. Raw material price per burger goes up by 10% every year. -Drinks- $38,400 -Other food supplies - $58,900 -Nonfood supplies- $50,200 3. The revenues at his current location are as follows: Sales value- S5 per hotdog. Sale price for hotdogs increase every year by 50% Average daily sales- #300 hotdogs. The sales increase every year by 20% in quantity Drinks- $100,000 Other food sales- $155,000 . . . 4. Working Capital as follows: Increase in the receivables (AR) is expected to be equal to 10% of gross sales Increase in payables associated with the new stand is estimated to be equal to 15% of the cost of raw products The project will require additional cash in the amount of 5% of gross sales Net working capital is fully recovered (1.c., reduced to zero) after the completion of the project 5. Other information: Marginal tax rate is 35% Cost of Capital is 10% Cost of the stand (kiosk), together with the cost of the equipment, furniture and fittings and the installation, is depreciated over five years according to the straight-line method. The stand (together with the furniture and kitchen equipment) is expected to be worth $300,000 after five years of service. . 2 Price per unit 3 No of units 4 Total Sale of Burgers 5 Drinks 6 Other food sales 7 8 Total Sales 9 10 Cost of Raw materials: 11 Burgers 12 Drinks 13 Other food supplies 14 Nonfood supplies 15 16 Total Cost of goods sold 17 18 Gross Profit 19 o Kitchen and service staff 1 License and rent costs 12 Depreciation 3 Earnings before tax Tax @ 35% Net Income Plus: Depreciation Purchase of retail kiosk Less: Change in Net working capital NPV Year 4 Year 5 + + + Uuuuuu NPV at Cost of Capital Tryout % Year 1 Year 2 Year 3 $ $ $ $ $ $ $ $ $ $ $ $ $ $ + 1 2 Rate 3 7.00% $ 4 8.00% $ 5 9.00% $ 610.00% $ 7 11.00% $ 8 12.00%) $ 9 13.00% $ 10 11 12 $1.00 13 $0.90 14 5080 115 $070 16 17 5060 $ $ $ $ $ $ $ - $ $ $ $ uuuuuu uuuuuuu suus Uuuuuuu $ $ $ $ $ $ $ $ $ . NPV and cost of capital 18 $0.50 19 $0.40 0 $0.30 1 $0.20 2 $0.10 3 $ 0.00% 2.00% 4.00% 5 6.00% 8.00% 1000X 12.00% 14.00% Write conclusion of what you see here: D $300.000
