You are starting a water filter manufacturing business and need to borrow the start-up funds. To convince a venture capitalist that this business will be profitable, you are asked to develop 1) an operating income statement and 2) a cash flow statement for the next 7-years. What is the Annual Equivalent for the project? Show your results for using your own money versus borrowing.

Assume the following information applies:

7- year venture

Assembly equipment = $2,000,000

MACRS = 7 years

Salvage at 7-yr = $250,000

MARR = 10%, Wholesale filters sell for $750 each Annual inflation is 5%Gross revenue is expected to increase at a rate of 8% per year (includes inflation)

Material Expense, $375/filter

Labor, $180/filter

Overhead = $3.50/filter

Make 900 filters/month

Assume 3-months accounts receivable

Assume 2-months inventory

Assume 2-month of raw materials on-hand

Assume 2-month accounts payable for raw materials

Interest Calculation:

Assume principle is $2,000,000 plus working capital12% interest is compounded monthly

Determine monthly (then annual) payment (10-year loan), (the loan must be paid in full by the end of year 7).

Calculate monthly (then annual) interest payments for tax purposes

Taxes:

Use corporate tax structure Capital gains tax rate is 15% for assets held over 1-year