The issue before you: You would like to turn your love of baking into a career. To that end, you have spent a year researching the industry and decided to open a community bakery with specialty items. You collected the following information: Equipment such as industrial ovens etc. will cost $270,000 and installation should cost 3,200. Equipment is expected to have a 5-year useful life. OR you could rent the equipment for 7-years at annual cost of $30,000. Display cases should cost 210,000 including installation and have a 7-year life. Depreciation: USE MACRS depreciation method You expect revenues to be about $600,000 the first year and increase 4%,5% or 6% a year (justify your choice). Expenses (rent, utilities etc.) are not expected to exceed 55% of revenues. You will require an initial investment in working capital of $20,000. The tax rate is 30% and your WACC is 9%. Evaluate the investment over 4-years. Scenario 1 - requires the full capital investment. Scenario 2 - leasing instead of buying the industrial equipment. Explain your reasoning. 1. Determine your initial investment outlay under both scenarios and provide a depreciation table for both scenarios in $ not % for the first 4 years. For example: equipment with a cost basis of $100,000 and a 3-year useful life will have depreciation of 33,330 in first year, 44,450 in year 2, 14,810 in year 3 and 7410 in year 4. 2. Calculate the Cash Flows for Scenario 1. Show calculations. 3. Calculate the value of Scenario 2. Show calculations 4. Calculate NPV and IRR for both Scenarios and reach a conclusion. The issue before you: You would like to turn your love of baking into a career. To that end, you have spent a year researching the industry and decided to open a community bakery with specialty items. You collected the following information: Equipment such as industrial ovens etc. will cost $270,000 and installation should cost 3,200. Equipment is expected to have a 5-year useful life. OR you could rent the equipment for 7-years at annual cost of $30,000. Display cases should cost 210,000 including installation and have a 7-year life. Depreciation: USE MACRS depreciation method You expect revenues to be about $600,000 the first year and increase 4%,5% or 6% a year (justify your choice). Expenses (rent, utilities etc.) are not expected to exceed 55% of revenues. You will require an initial investment in working capital of $20,000. The tax rate is 30% and your WACC is 9%. Evaluate the investment over 4-years. Scenario 1 - requires the full capital investment. Scenario 2 - leasing instead of buying the industrial equipment. Explain your reasoning. 1. Determine your initial investment outlay under both scenarios and provide a depreciation table for both scenarios in $ not % for the first 4 years. For example: equipment with a cost basis of $100,000 and a 3-year useful life will have depreciation of 33,330 in first year, 44,450 in year 2, 14,810 in year 3 and 7410 in year 4. 2. Calculate the Cash Flows for Scenario 1. Show calculations. 3. Calculate the value of Scenario 2. Show calculations 4. Calculate NPV and IRR for both Scenarios and reach a conclusion
