Question
You and your business partners are considering applying for a franchise. If approved, you expect startup costs to be $650,000 in equipment that is depreciable.
You and your business partners are considering applying for a franchise. If approved, you expect startup costs to be $650,000 in equipment that is depreciable. You will use a 5-year MARCUS method to depreciate the $650,000 equipment. Your plan is to start and operate the business for 6 years at which time you expect to sell the business for $1,000,000. You expect to initially have working capital needs of $25,000, but these have additional needs by $6,000 per year in the 6 years. You expect sales in the first year to be $350,000 and that sales will grow by 12% per year. You project annual fixed operating expenses of $50,000 in the first year. These fixed expenses will grow by $5,000 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 12%. Should you apply for a Guthries Franchise? Write a paragraph supporting your recommendation .
| Year | 1 | 2 | 3 | 4 | 5 | 6 | |
| Sales | $ 350,000.00 | $ 392,000.00 | $ 439,040.00 | $ 491,724.80 | $ 550,731.78 | $ 616,819.59 | |
| Fixed Costs | $ 50,000.00 | $ 55,000.00 | $ 60,000.00 | $ 65,000.00 | $ 70,000.00 | $ 75,000.00 | |
| Variable Cost | $ 175,000.00 | $ 196,000.00 | $ 219,520.00 | $ 245,862.40 | $ 275,365.89 | $ 308,409.79 | |
| Depreciaition | $ 130,000.00 | $ 208,000.00 | $ 124,800.00 | $ 74,880.00 | $ 74,880.00 | $ 37,440.00 | |
| EBIT | $ (5,000.00) | $ (67,000.00) | $ 34,720.00 | $ 105,982.40 | $ 130,485.89 | $ 195,969.79 | |
| Taxes | $ (1,050.00) | $ (14,070.00) | $ 7,291.20 | $ 22,256.30 | $ 27,402.04 | $ 41,153.66 | |
| Net Income | $ (3,950.00) | $ (52,930.00) | $ 27,428.80 | $ 83,726.10 | $ 103,083.85 | $ 154,816.14 | |
| OCF | $ 126,050.00 | $ 155,070.00 | $ 152,228.80 | $ 158,606.10 | $ 177,963.85 | $ 192,256.14 | |
| D rate | $ 0.20 | $ 0.32 | $ 0.19 | $ 0.12 | $ 0.12 | $ 0.06 | |
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| OCF | $ 126,050.00 | $ 155,070.00 | $ 152,228.80 | $ 158,606.10 | $ 177,963.85 | $ 192,256.14 | |
| Net Capital Spending | $ (650,000.00) | ||||||
| Changes in NWC | $ (25,000.00) | $ (6,000.00) | $ (6,000.00) | $ (6,000.00) | $ (6,000.00) | $ (6,000.00) | $ 55,000.00 |
| CFFA | $ 675,000.00 | $ 132,050.00 | $ 161,070.00 | $ 158,228.80 | $ 164,606.10 | $ 183,963.85 | $ 137,256.14 |
| Salvage Value | $ 1,000,000.00 | ||||||
| After Tax Salvage | $ 790,000.00 |
This is the pro forma income statement and cash flows
What is the NPV? Explain in detail how you got it and please show me what formula you used? I need a paragraph that explains and supports the recommendation.
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