8. Bob’s Submarine Sandwiches expects annual sales of $180,000, annual fixed cas

Question

8. Bob’s Submarine Sandwiches expects annual sales of $180,000, annual fixed cash outlays are $51,750 a year at each location, variable cash outlays are 35 percent of sales, depreciation is $14,000 per year, and taxes are 28% (of pretax income). Opening promotion and other costs require an initial outlay of $66,000. The company does its analysis based on a 8-year store life. Bob believes the business can be sold for $110,000 after taxes (disposal value) at the end of its 8 year lifer. Using a 9% required return, what is the net present value of this venture?

Explanation / Answer

Tax rate 28% Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Sale             180,000       180,000               180,000         180,000               180,000         180,000         180,000 180,000 Less: Operating Cost                63,000         63,000                 63,000           63,000                 63,000           63,000           63,000      63,000 Contribution             117,000       117,000               117,000         117,000               117,000         117,000         117,000 117,000 Less: Fixed Cost                51,750         51,750                 51,750           51,750                 51,750           51,750           51,750      51,750 Less: Depreciation as per table given below                14,000         14,000                 14,000           14,000                 14,000           14,000           14,000      14,000 112,000 Profit before tax               51,250         51,250                 51,250           51,250                 51,250           51,250           51,250     51,250 Tax                14,350         14,350                 14,350           14,350                 14,350           14,350           14,350      14,350 Profit After Tax               36,900         36,900                 36,900           36,900                 36,900           36,900           36,900     36,900 Add Depreciation                14,000         14,000                 14,000           14,000                 14,000           14,000           14,000      14,000 Cash Profit After tax               50,900         50,900                 50,900           50,900                 50,900           50,900           50,900     50,900 Calculation of NPV 9.00% Year Initial Operating cost Captial Operating cash Annual Cash flow PV factor Present values 0             (66,000)            (112,000)             (178,000) 1.000             (178,000) 1         50,900                 50,900 0.917                 46,697 2         50,900                 50,900 0.842                 42,842 3         50,900                 50,900 0.772                 39,304 4         50,900                 50,900 0.708                 36,059 5         50,900                 50,900 0.650                 33,082 6         50,900                 50,900 0.596                 30,350 7         50,900                 50,900 0.547                 27,844 8                       -               110,000         50,900               160,900 0.502                 80,750 Net Present Value               158,928

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