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
8,00,000
8,00,000
8,00,000
8,00,000
(-)Direct Material Cost (50% of sales)
4,00,000
4,00,000
4,00,000
4,00,000
4,00,000
(-)Indirect cost
1,00,000
1,00,000
1,00,000
1,00,000
1,00,000
(-)Depreciation( 750,000/10)
75,000
75,000
75,000
75,000
75,000
Profit
2,25,000
2,25,000
2,25,000
2,25,000
2,25,000
(-)Tax 37%
83,250
83,250
83,250
83,250
83,250
Profit after taxes
1,41,750
1,41,750
1,41,750
1,41,750
1,41,750
Net cash flows (Profit after taxes + depreciation)
2,16,750
2,16,750
2,16,750
2,16,750
2,16,750
In the Period 0 there is ouflow of $750,000.
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
8,00,000
8,00,000
8,00,000
8,00,000
(-)Direct Material Cost (50% of sales)
4,00,000
4,00,000
4,00,000
4,00,000
4,00,000
(-)Indirect cost
1,00,000
1,00,000
1,00,000
1,00,000
1,00,000
(-)Depreciation( 750,000/10)
75,000
75,000
75,000
75,000
75,000
Profit
2,25,000
2,25,000
2,25,000
2,25,000
2,25,000
(-)Tax 37%
83,250
83,250
83,250
83,250
83,250
Profit after taxes
1,41,750
1,41,750
1,41,750
1,41,750
1,41,750
Net cash flows (Profit after taxes + depreciation)
2,16,750
2,16,750
2,16,750
2,16,750
2,16,750
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