2. Whole Foods is thinking about opening up a new, smaller location in a local m

Question

2. Whole Foods is thinking about opening up a new, smaller location in a local mall (call it "Half Foods"). Equipment and fixtures will cost them S400,000 to be depreciated on a straight-line basis over five years to SO (they will, however, have a salvage value at the end of the store of $100,000). Net working capital will need to be increased immediately by S500,000. First year sales are expected to be S1 million, and will increase at a rate of 8% per year over the ten-year life of the store. Expenses (excluding depreciation) will start at $850,000 the first year and grow at a 7% annual rate each year thereafter. The marginal tax rate is 40%. Calculate the net after-tax cash flows of the store for each year from years 0 to 10 (and assume the working capital investment can be recovered at the end of year 10) 3. Calculate the net present value and the profitability index of the Whole Foods project in question #2. Assume the cost of capital is 10%. Is the IRR higher or lower than 10%? Should the project be completed?

Explanation / Answer

Calculation of depreciation for the Year Calculagtion of Net After tax cash flows Equipement and fixtures cost 400000 Year Sales Depreciation Expenses Net Working Capital Net Profit Before Tax Tax @40% Profit after Tax Depreciation Net After tax Cashflows($) Salvage Value 100000 1 1000000          60,000 850000 0                               90,000 36000                  54,000              60,000                                        114,000 300000 2 1080000          60,000 909500 0                             110,500 44200                  66,300              60,000                                        126,300 No of years 5 3 1166400          60,000 973165 0                             133,235 53294                  79,941              60,000                                        139,941 Depreciation for year 60000 4 1259712          60,000 1041286.55 0                             158,425 63370.18                  95,055              60,000                                        155,055 5 1360488.96          60,000 1114176.609 0                             186,312 74524.9406                111,787              60,000                                        171,787 6 1469328.077                   -   1192168.971 0                             277,159 110863.6423                166,295                       -                                          166,295 7 1586874.323                   -   1275620.799 0                             311,254 124501.4095                186,752                       -                                          186,752 8 1713824.269                   -   1364914.255 0                             348,910 139564.0055                209,346                       -                                          209,346 9 1850930.21                   -   1460458.253 0                             390,472 156188.783                234,283                       -                                          234,283 10 1999004.627                   -   1562690.331 0                             436,314 174525.7186                261,789                       -                                          261,789 CALCULTION OF NET PRESENT VALUE Profitability Index Year Cash Flows PVF @10%. PV Cashflows Formula Present value of cash inflows/Initial investment 1                114,000 1 103626 1.383304444 2                126,300 0.826 104323.8 3                139,941 0.751 105095.691 Profitability Index 1.383304444 4                155,055 0.683 105902.7494 5                171,787 0.621 106679.9822 6                166,295 0.564 93790.64137 At IRR Present value of Cash inflows=Prsent value of cash outflows 7                186,752 0.513 95803.83465 8                209,346 0.467 97764.58586 9                234,283 0.424 99336.06597 10                261,789 0.386 101050.3911                                   10 600000 0.386 231600 Cash Inflows 1244973.742 $ Cashotflows 900000 $ Net present Value 344973.7415 $

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