Josephine has been through several start up situations and has the time, wealth

Question

Josephine has been through several start up situations and has the time, wealth and connections to do another one. She is now planning the next startup that looks very promising with sales expected to double every year. Following is the information that has been collected and the expected income statement. The investments, depreciation and book value results are provided below and are to be used as they are presented. Help Josephine with her 5-year plan by preparing a cash flow statement and determine the present worth and future worth of this proposal. Revenue in year 0 $1,500,000 Company worth at end of year 5 $125,000,000 Income Tax rate 20% Capital Gains Tax rate 12% MARR 20% Year 0 1 2 3 4 5 Annual Investment $5,000,000 $10,000,000 $20,000,000 $30,000,000 $30,000,000 $0 Annual Depreciation $1,000,000 $5,200,000 $11,040,000 $17,776,000 $24,048,000 Book Value $5,000,000 $14,000,000 $28,800,000 $47,760,000 $59,984,000 $35,936,000 Working Capital 0 1 2 3 4 5 Accounts Receivable $0 $250,000 $400,000 $550,000 $700,000 $850,000 Inventory $10,000 $100,000 $150,000 $200,000 $250,000 $300,000 Accounts Payable $20,000 $180,000 $180,000 $180,000 $180,000 $180,000 Wages Payable $5,000 $50,000 $65,000 $80,000 $95,000 $110,000 Income Statement 0 1 2 3 4 5 Revenue $3,000,000 $6,000,000 $12,000,000 $24,000,000 $48,000,000 COGS ($900,000) ($1,800,000) ($3,600,000) ($7,200,000) ($14,400,000) Gross Margin $2,100,000 $4,200,000 $8,400,000 $16,800,000 $33,600,000 SG&A ($180,000) ($315,000) ($551,250) ($964,688) ($1,688,203) Depreciation ($1,000,000) ($5,200,000) ($11,040,000) ($17,776,000) ($24,048,000) EBIT $920,000 ($1,315,000) ($3,191,250) ($1,940,688) $7,863,797 Tax ($184,000) $263,000 $638,250 $388,138 ($1,572,759) Net Income $736,000 ($1,052,000) ($2,553,000) ($1,552,550) $6,291,038 Josephine has been through several start up situations and has the time, wealth and connections to do another one. She is now planning the next startup that looks very promising with sales expected to double every year. Following is the information that has been collected and the expected income statement. The investments, depreciation and book value results are provided below and are to be used as they are presented. Help Josephine with her 5-year plan by preparing a cash flow statement and determine the present worth and future worth of this proposal. Revenue in year 0 $1,500,000 Company worth at end of year 5 $125,000,000 Income Tax rate 20% Capital Gains Tax rate 12% MARR 20% Year 0 1 2 3 4 5 Annual Investment $5,000,000 $10,000,000 $20,000,000 $30,000,000 $30,000,000 $0 Annual Depreciation $1,000,000 $5,200,000 $11,040,000 $17,776,000 $24,048,000 Book Value $5,000,000 $14,000,000 $28,800,000 $47,760,000 $59,984,000 $35,936,000 Working Capital 0 1 2 3 4 5 Accounts Receivable $0 $250,000 $400,000 $550,000 $700,000 $850,000 Inventory $10,000 $100,000 $150,000 $200,000 $250,000 $300,000 Accounts Payable $20,000 $180,000 $180,000 $180,000 $180,000 $180,000 Wages Payable $5,000 $50,000 $65,000 $80,000 $95,000 $110,000 Income Statement 0 1 2 3 4 5 Revenue $3,000,000 $6,000,000 $12,000,000 $24,000,000 $48,000,000 COGS ($900,000) ($1,800,000) ($3,600,000) ($7,200,000) ($14,400,000) Gross Margin $2,100,000 $4,200,000 $8,400,000 $16,800,000 $33,600,000 SG&A ($180,000) ($315,000) ($551,250) ($964,688) ($1,688,203) Depreciation ($1,000,000) ($5,200,000) ($11,040,000) ($17,776,000) ($24,048,000) EBIT $920,000 ($1,315,000) ($3,191,250) ($1,940,688) $7,863,797 Tax ($184,000) $263,000 $638,250 $388,138 ($1,572,759) Net Income $736,000 ($1,052,000) ($2,553,000) ($1,552,550) $6,291,038

Explanation / Answer

Present worth = -$5,000,000 -8,399,000/1.2 -16,037,000/1.2^2 -21,698,000/1.2^3 -13,961,550/1.2^4 +30,154,038/1.2^5 + $125,000,000/1.2^=$19,927,242.32

future worth = $19,927,242.32*1.2^5=$ 49,585,355.61

EBIT x (1-Tax rate) Current Income Statement + Depreciation & Amortization Current Income Statement - Changes in Working Capital Prior & Current Balance Sheets: Current Assets and Liability accounts - Capital expenditure Prior & Current Balance Sheets: Property, Plant and Equipment accounts = Free Cash Flow

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