Capital Budget of a Coffee Shop

470 Words2 Pages
The capital budget is a means by which the cash flows of the project can be evaluated, to ensure that the project is worth undertaking. There are a few key concepts that need to be remembered when creating a capital budget. The first is that the capital budget only includes cash flows. Thus for example, the depreciation expense is not included. However, because the depreciation expense lowers the operating income, it lowers the company's tax burden. Thus, there is a cash flow associated with depreciation the tax benefit. The other important concept to remember is that the cash flows need to be discounted to present value. A dollar received in the future is not worth as much as a dollar received today, because of the impact of inflation on the purchasing power of that dollar. The capital budget for this project is as follows: Hot New Café Cash Flow Analysis Year 0 1 2 3 4 5 Sales 800000 800000 800000 800000 800000 Direct Costs -400000 -400000 -400000 -400000 -400000 Indirect Costs -100000 -100000 -100000 -100000 -100000 Cost of Café -750000 Depreciation Benefit  55500 55500 55500 55500 55500 FV -750000 355500 355500 355500 355500 355500 The net present value of this project is $531,498. The payback period is 2.58 years, or 2 years, 7 months and 2 days, approximately. The project should be accepted. In general, barring any opportunity costs (other mutually exclusive projects) any project with a positive net present value
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