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While attending college, you want to use your free time to start a new business. Your first idea is to open a bakery shop selling
While attending college, you want to use your free time to start a new business. Your first idea is to open a bakery shop selling Bundt cakes. Before you decide to execute this idea, you would like to do a capital budgeting analysis to see if this is a profitable business. Here are your main assumptions: - You will keep the bakery open for 12 year. - To start up, you have to invest $150,000 for your fixed assets. - Revenue in first year is $120,000, and should grow by 3% per year. - Rent of the storefront costs $35,000 per year, and should grow by 2% per year. - COGS (food supplies, kitchen equipment, silvers, etc) cost $30,000 per year. - Employee salaries cost $40,000 per year. - Utilities cost $5,000 per year. - You will depreciate your fixed assets using a straight-line depreciation method. Assuming all your fixed assets have a usable life of 15 years and a salvage value totaling $8,000. - After 12 years in business, you plan to leave the business and sell your fixed assets based on its salvage value. - Income tax rate is 30%. - Capital gains tax rate is 15\%. (1) If you require at least 10% return, what's NPV and IRR of this investment? (2) Create a NPV profile. While attending college, you want to use your free time to start a new business. Your first idea is to open a bakery shop selling Bundt cakes. Before you decide to execute this idea, you would like to do a capital budgeting analysis to see if this is a profitable business. Here are your main assumptions: - You will keep the bakery open for 12 year. - To start up, you have to invest $150,000 for your fixed assets. - Revenue in first year is $120,000, and should grow by 3% per year. - Rent of the storefront costs $35,000 per year, and should grow by 2% per year. - COGS (food supplies, kitchen equipment, silvers, etc) cost $30,000 per year. - Employee salaries cost $40,000 per year. - Utilities cost $5,000 per year. - You will depreciate your fixed assets using a straight-line depreciation method. Assuming all your fixed assets have a usable life of 15 years and a salvage value totaling $8,000. - After 12 years in business, you plan to leave the business and sell your fixed assets based on its salvage value. - Income tax rate is 30%. - Capital gains tax rate is 15\%. (1) If you require at least 10% return, what's NPV and IRR of this investment? (2) Create a NPV profile
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