You are developing a proposal to open three new mexican restaurants around the M

Question

You are developing a proposal to open three new mexican restaurants around the Metro Detroit area over the next four years. The project requires a purchase of $800,000 of equipment with a four year useful life and a book value of zero at the end of the four years. However, you expect to be able to sell the equipment at the end of the development project for $350,000. During the four years of the project, you will need $175,000 net working capital, fixed costs will be $500,000 and variable costs will be $125,000 per restaurant location. The investors that you plan to bring your proposal to require a return of at least 10% on any investments they make. Your tax rate is 30%. What is the lowest amoun that you should bid per restaurant? By hand and not excel please!

Explanation / Answer

Cost of equipment     8,00,000 Salvage amount at the end of 4 year     NIL Expected Sale price     3,50,000 Working capital     1,75,000 Fixed cost     5,00,000 Variable cost     3,75,000 Total Investment 18,50,000 Required return @ 10%     1,85,000 Total Cash inflow should be 20,35,000 After tax Cash flow from sale of equipment     2,45,000 350000*(1-.3) balance required Amount 17,90,000 Total No.of restraurent     3 Lowest bid price per restaurent($) 5,96,667

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