Reference no: EM132801720

Calculating 'cash flows at the start'

Bob's Buffalo Burgers (BBB) is considering building a new restaurant. The new restaurant costs $800,000 immediately. Over the past three months, BBB has already incurred expenses of $20,000 relating to market research to identify demand for new types of burgers to be served at the new restaurant. Annual sales will increase by $160,000 if they build the new restaurant.

BBB must dispose of $80,000 of redundant kitchen equipment today if the new restaurant is approved. The kitchen equipment initially cost $230,000 seven years ago and is fully depreciated for tax purposes.

For the new restaurant, BBB forecasts that $25,000 of inventory will be required, and an additional $5,000 of accounts receivable will be required today on top of the existing level of $6,000. The accounts payable balance will increase from the current level of $23,000 to $30,000 if the new restaurant proceeds.

BBB will use social media to advertise the new restaurant on the same day it opens. The advertising costs $8,500 and is an allowable expense for taxation purposes, Because this expense will reduce the new restaurant's profitability, managers have suggested that the advertising expense be accounted for by spreading it equally over the ten-year analysis period.

Managers plan to borrow $600,000 to fund part of the restaurant's cost. The annual interest expense is $30,000. Assume the company tax rate is 30%.

What are the 'cash flows at the start'?