Question
You have a full-time job but want to bake and sell cupcakes on evenings and weekends. You live in an apartment, so you will need
You have a full-time job but want to bake and sell cupcakes on evenings and weekends. You live in an apartment, so you will need to rent a bakery space and spend some money up front for special equipment. You want to know if this idea is worth pursuing. You estimate the following items related to the project in an Excel file.
Cupcake bakery project description Project life (years) 3 Required return 20% Sales information Unit sales (annual) 8,500 Unit price $2.60 Cost information Unit cost $1.05 Bakery rent (annual) $12,000
Equipment cost (one-time purchase) $900 After-tax equipment salvage (Year 3) $0 Depreciation expense (annual) Straight line method Tax rate 21% Year 0 total capital spending - equipment $900 Change in net working capital Year 0 -$1,500 Year 1 $0 Year 2 $0 Year 3 $1,500 (recovery)
Required: 1. Prepare pro forma income statements for three years 2. Prepare pro forma cash flows from assets (free cash flow) for three years 3. Calculate the projects NPV 4. Calculate the projects IRR 5. Insert a text box in your spreadsheet. In it, state whether you should pursue this project, and briefly explain your rationale.
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