A quaint but well-established coffee shop, the Hot New Cafe, wants to build a ne

ID: 2806637 • Letter: A

Question

A quaint but well-established coffee shop, the Hot New Cafe, wants to build a new cafe for increased capacity. Expected sales are $800,000 for the first 5 years. Direct costs including labor and materials will be 50% of sales. Indirect costs are estimated at $100,000 a year. The cost of the building for the new cafe will be a total of $750,000, which will be depreciated straight line over the next 5 years. The firm's marginal tax rate is 37%, and its cost of capital is 12%.. Prepare a capital budget for Hot New Café with net cash flows over a 5-year period. Show me how to begin this

Explanation / Answer

Here is the answer

Capital budget for Hot new cafe Showing cash flows for 5 years

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

Sales

8,00,000

(-)Direct Material Cost (50% of sales)

4,00,000

(-)Indirect cost

1,00,000

(-)Depreciation( 750,000/10)

75,000

Profit

2,25,000

(-)Tax 37%

83,250

Profit after taxes

1,41,750

Net cash flows (Profit after taxes + depreciation)

2,16,750

In the Period 0 there is ouflow of $750,000.