9. Please rework the prior problem to determine what annual sales volume is need

Question

9. Please rework the prior problem to determine what annual sales volume is needed to generate a net present value of $0? To do this you will need to review the problem in the book and its excel answer. I will repeat the instructions here. You will need to calculate the net present value in the traditional way. You must make sure that the second year sales references the first year ( plus “first year” in the formula). You will then do a goal seek to solve this problem The goal seek function is accessed by clicking on the DATA tab -- then clicking on the “what if” box -- then clicking on the goal seek box. To use this function, you will set the “npv” cell to zero by changing the first years sales cell. There are videos that illustrate how to do a goal seek on the internet. If you cannot figure this out, you may email me a phone number where you can be reached during the day (and one during the evening – I will not call after 9:00pm your time). This offer is only good in the continental US -- sorry 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

(i)                  Initial Cash Outflow = $ 66000

(ii)                Calculation of Free cash Inflows :

PARTICULARS

AMOUNT($)

SALE

180000

Less: Variable Cash Outlay (35% of Sales)

63000

Less: Fixed Cost

51750

Less: Depreciation

14000

Profit Before Tax

51250

Less: Tax @28%

14350

Profit After tax

36900

Add: Depreciation (Non Cash Cost)

14000

Free Cash Inflows

50900

(iii)               Cash Inflow at the End of Year – 8 = $110000

(iv)              Calculation of Net Present Value :

YEAR

CASH FLOW ($)

DISCOUNTING FACTOR @9%

DISCOUNTED CASH FLOWS ($)

0

(66000)

1

(66000)

1 TO 8

50900

5.5348

281721

8

110000

0.5018

55198

NET PRESENT VALUE

270919

PARTICULARS

AMOUNT($)

SALE

180000

Less: Variable Cash Outlay (35% of Sales)

63000

Less: Fixed Cost

51750

Less: Depreciation

14000

Profit Before Tax

51250

Less: Tax @28%

14350

Profit After tax

36900

Add: Depreciation (Non Cash Cost)

14000

Free Cash Inflows

50900

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.