You have determined in your mind that you would like to have a business

of your own, although your father runs a family restaurant in your

local city. You have therefore, decided to have a medium size snack

and cocktails bar which will accommodate the cruise ship passengers

who visit your city. You plan to keep the business for five years

after which you will sell it off to your brother John for $$2,000,000$

and go off to do your Master$$s Degree in the UK$.$ Though you will be

occupying the establishment from your grandmother for free, you have

decided that you need to make some improvements to the property which

will cost you $$1,500,000.$ Additionally, you will spend $$275,000$ in

bar stools, tables and decorations. If this space had been leased out,

it would have fetched a lease rental of $$75,000$ per year. You will

depreciate the assets over $7$ years using MACRS. You have determined

that you would need an average cash balance of $$15,000$ and inventory

of $$20,000$ while Accounts payable should average $$10,000.$ You plan to

borrow the money from a local bank and pay interest at a rate of $15$

percent. To increase your chances of success at the business you plan

to have your cousin Johnathan to conduct a market survey which will

cost you $$100,000.$ Your new venture will decrease the revenue your

family business will earn by $$15,000$ per year and you have agreed to

allow your father to take this amount from your allowance as a

shareholder of the family restaurant.

Revenues are projected to be $$500,000$ the first year and is expected

to increase by $20\%$ the second year, $15\%$ the third year and to continue

to increase at $10\%$ thereafter. Fixed annual operating costs are

expected to be salaries of $$110,000,$ Utilities $$75,000,$ Food and

Liquor License is $15\%$ of gross revenues and taxes are $40\%$ of net

revenues.

A$.$ Calculate the initial outlay and depreciable value of the project.

$(2$ marks$)$

B$.$ Calculate the annual after$-$tax operating cash flow for Years $1-5.$

$(6$ marks$)$

C$.$ Determine the terminal year $($in year $5)$ after$-$tax non$-$operating

cash flow. $(4$ marks$)$

D$.$ What is the project NPV$?(4$ marks$)$

E$.$ What is the estimated Internal Rate of Return $($IRR$)$ of the project?

Should the project be accepted based on the IRR criterion? Why?

$(4$ marks$)$