Answered: You and your business partners are…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

V2. You and your business partners are considering applying for a franchise. If approved, you expect startup costs to be $650,000 in equipment that is depreciable. You will use a 5-year MARCUS method to depreciate the $650,000 equipment. Your plan is to start and operate the business for 6 years at which time you expect to sell the business for $1,000,000. You expect to initially have working capital needs of $25,000, but these have additional needs by $6,000 per year in the 6 years. You expect sales in the first year to be $350,000 and that sales will grow by 12% per year. You project annual fixed operating expenses of $50,000 in the first year. These fixed expenses will grow by $5,000 per year. Your annual variable operating expenses are expected to be 50% of sales. You expect to pay taxes of 21%. Assume your required return is 12%. Should you apply for Franchise? Prepare a report responding to the following prompts: Consider what happens to cash flows and NPV if Sales are 20% MORE than expected. Discuss this analysis. Please answer for 20% MORE

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