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:

QUESTION:

Prepare pro forma income statements and operating cash flow projections. Explain your pro forma statements in your report.