You and your business partners are considering applying for a franchise. If approved, you expect startup costs to be $500,000 in real estate costs, which are not depreciable, plus another $100,000 in equipment that is depreciable. You will be allowed to depreciate the $100,000 in equipment on a five-year MACRS schedule. The $500,000 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 5 years at which time you expect to sell the business for $1,000,000. You expect to initially have working capital needs of $45,000, but these needs will grow by $2,500 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 $75,000 in the first year. These fixed expenses will grow by $2,500 per year. Your annual variable operating expenses are expected to be 50% of sales. You expect to pay taxes of 17%. Assume your required return is 13%.

1.Prepare pro forma income statements and operating cash flow projections.

2.Estimate the total cash flows for this opportunity.

3.Estimate the opportunity's NPV.

4.Consider what happens to cash flows and NPV if Sales are 20% more than expected. What if sales are 20% less than expected?