1- Estimate the annual cash flows for the brewpub project. Use the \"best case s

Question

1- Estimate the annual cash flows for the brewpub project. Use the "best case scenario". To do this, calculate the annual revenues and annual expenses for the 10 year project,any changes in the net working capital, and any changes to capital expenditures. Describe all assumptions and calculations you used to arrive at the final cash flows.

2- Calculate the NPV and IRR of the project given the information presented using the "best case scenario".

Project Details are:-

The space cost $2500 per month. Intial construction cost could be $250,000. In a barrel of beer, there are 31 gallons of beer. There are 8 pints in a gallon. Samantha estimates that each seat in restaurant will require about 7 barresl of beer (best case scenario) per year. They own a 80 seat restaurant . Cost of high quality brewpub system is $300,000. Ingredients costs $4,000 to make 10 barrels of beer. These costs are expected to increase 5 percent per year. Maintenance cost of about $15,000 per year (after the first year of operations). Three additional servers per day at a cost to the restauant of $80 per day per server , and servers typically work 320 days out of the year. An additional person to run the brewery machinery on a full time basis at a starting salary of $40,000 per year. The business increase salary at 3 percent per year. Insurance cost 3000 per year. Utilities costs about $24000 per year. An fees to obtain license is $65,000 and then $700 per year as a license renewal fee. The restaurant paid a media fees of $20,000 and then expect the advertisement fees of $80,000 per year.

The sale price is set on $5 per pint during the first year of operation. They hope to increase this price by 3 percent each year thereafter.

Explanation / Answer

1.

2.

MARR is not given. Suppose that it is 8% (assumed).

R = 8%

NPV = Present value of cash inflows – Present value of cash outflow

NPV = NPV = 239900/1.08 + 233332/1.08^2 + 241793/1.08^3 + 250272.55/1.08^4 + 258759.57/1.08^5 + 267241.88/1.08^6 + 275706.4/1.08^7 + 284138.96/1.08^8 +292524.32/1.08^9 + 300846.05/1.08^10   - 635000

NPV = $1107658.62

For IRR

At R = 38%

PV of net cash inflows = $626423.29

At R = 37%

PV of net cash inflows = $641995.30

Thus,

IRR = 37% + ((PV at 37% - cash outflow)/( PV at 37% - PV at 38%))*(38%-37%)

IRR=37% + ((641995.30 – 635000)/( 641995.30-626423.29))*(1%)

IRR = 37.45%

year Expenses ($) 0 1 2 3 4 5 6 7 8 9 10 Space cost ($2500 per month) 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Initial Construction cost 250000 Brewpub system cost 300000 ingredient cost ($4000 / 10 barrel) 224000 235200 246960 259308 272273.4 285887.1 300181.4 315190.5 330950 347497.5 Maintenance cost 15000 15000 15000 15000 15000 15000 15000 15000 15000 Cost of servers 76800 76800 76800 76800 76800 76800 76800 76800 76800 76800 salary of person running brewery 40000 41200 42436 43709.08 45020.35 46370.96 47762.09 49194.95 50670.8 52190.93 insurance cost 3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 license cost 65000 License Renewal cost 700 700 700 700 700 700 700 700 700 700 Media Fee 20000 Advertisement fee 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Total expenses (yearly basis) 635000 454500 481900 494896 508517.08 522793.75 537758.03 553443.52 569885.45 587120.82 605188.45 year Revenue ($) 0 1 2 3 4 5 6 7 8 9 10 0 694400 715232 736689 758789.6 781553.3 804999.9 829149.9 854024.4 879645.1 906034.5 Net Annual Cash flow -635000 239900 233332 241793 250272.5 258759.6 267241.9 275706.4 284139 292524.3 300846.1 Working capital 340800 353200 366196 379817.1 394093.8 409058 424743.5 441185.4 458420.8 476488.4 Annual change in working capital 12400 12996 13621.08 14276.67 14964.28 15685.48 16441.93 17235.37 18067.63 Space cost = $2500 per month = 12*2500 = $30000 per year Ingredient cost = $4000 / 10 barrel Total ingredient cost per year = 7*80*4000/10 = $224000 ( it increases 5% annually) Cost of 3 servers = $80 per day per server Total cost of servers = 3*80*320 = $76800 salary of person = $ 40000 that increases 3% annually Note: there is no change in fixed cost / capital expenditure

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