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

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 20, 2024

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.