Miglietti Restaurants is looking at a project with the following forecasted? sal
ID: 2614676 • Letter: M
Question
Miglietti Restaurants is looking at a project with the following forecasted? sales: ? first-year sales quantity of 31,000?,
with an annual growth rate of 2.00?% over the next ten years. The sales price per unit will start at $42 and will grow at 4.50?% per year. The production
costs are expected to be 55?% of the current? year's sales price. The manufacturing equipment to aid this project will have a total cost? (including
installation) of $2,400,000.?? It will be depreciated using? MACRS, and has a? seven-year MACRS life classification. Fixed costs will be $340,000
per year. Miglietti Restaurants has a tax rate of 30?%. What is the operating cash flow for this project over these ten? years?
Explanation / Answer
Calculation of operating cash flows over ten years Year 1 2 3 4 5 6 7 8 9 10 Sales (in units) 31000 31620 32252 32897 33555 34227 34911 35609 36321 37048 Sales price per unit $42.00 $43.89 $45.87 $47.93 $50.09 $52.34 $54.69 $57.16 $59.73 $62.42 Sales $1,302,000.00 $1,387,801.80 $1,479,257.94 $1,576,741.04 $1,680,648.27 $1,791,402.99 $1,909,456.45 $2,035,289.63 $2,169,415.22 $2,312,379.68 Less : Production cost [$23.10 per unit] $716,100.00 $730,422.00 $745,030.44 $759,931.05 $775,129.67 $790,632.26 $806,444.91 $822,573.81 $839,025.28 $855,805.79 Less : Fixed cost $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 $340,000.00 Less : Depreciation $342,960.00 $587,760.00 $419,760.00 $299,760.00 $214,320.00 $214,080.00 $214,320.00 $107,040.00 $0.00 $0.00 Profit before tax -$97,060.00 -$270,380.20 -$25,532.50 $177,049.99 $351,198.60 $446,690.73 $548,691.54 $765,675.82 $990,389.93 $1,116,573.89 less : Tax @ 30% -$29,118.00 -$81,114.06 -$7,659.75 $53,115.00 $105,359.58 $134,007.22 $164,607.46 $229,702.75 $297,116.98 $334,972.17 Add : Depreciation $342,960.00 $587,760.00 $419,760.00 $299,760.00 $214,320.00 $214,080.00 $214,320.00 $107,040.00 $0.00 $0.00 Operating Cash flow $275,018.00 $398,493.86 $401,887.25 $423,694.99 $460,159.02 $526,763.51 $598,404.08 $643,013.08 $693,272.95 $781,601.72 Working Production cost per unit = 55% of Current year sales price = 55% * $42 = $23.10 Calculation of depreciation on equipment using 7 year MACRS rates Year Installed cost Depreciation rates Depreciation 1 $2,400,000.00 14.29% $342,960.00 2 $2,400,000.00 24.49% $587,760.00 3 $2,400,000.00 17.49% $419,760.00 4 $2,400,000.00 12.49% $299,760.00 5 $2,400,000.00 8.93% $214,320.00 6 $2,400,000.00 8.92% $214,080.00 7 $2,400,000.00 8.93% $214,320.00 8 $2,400,000.00 4.46% $107,040.00