What is estimated internal rate of return of the project

Assignment Help Financial Management

Reference no: EM131523376

You have determined in your mind that you would like to have a business of your own, although your father runs a family restaurant in your local city. You have therefore, decided to have a medium size snack and cocktails bar which will accommodate the cruise ship passengers who visit your city. You plan to keep the business for five years after which you will sell it off to your brother John for $2,000,000 and go off to do your Master’s Degree in the UK. Since you will be occupying the establishment from your grandmother for free, you have decided that you need to make some improvements to the property which will cost you $1,500,000. Additionally you will spend $275,000 in bar stools, tables and decorations. The Leasing of such a space in the area would cost $75,000 per year. You will depreciate the assets over 7 years using MACRS. You have determined that you would need an average cash balance of $15,000 and inventory of $20,000 while Accounts payable should average $10,000. You plan to borrow the money from a local bank and pay interest at a rate of 15 percent. To increase your chances of success at the business you plan to have your cousin Johnathan to conduct a market survey which will cost you $100,000. Your new venture will decrease the revenue your family business will earn by $15,000 per year and you have agreed to allow your father to take this amount from your allowance as a shareholder of the family restaurant.

Revenues are projected to be $500,000 the first year and is expected to increase by 20% the second year, 15% the third year and to continue to increase at 10% thereafter. Fixed annual operating costs are expected to be salaries of $110,000, Utilities $75,000, Food and Liquor License is 15% of revenues and Taxes are 40% of net revenues.

Required:

A. Calculate the initial outlay of the project.

B. Calculate the annual after-tax operating cash flow for Years 1 -5.

C. Determine the terminal year (in year 5) after-tax non-operating cash flow.

D. What is the project NPV?

E. What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR criterion? Why?

Reference no: EM131523376

Questions Cloud

Qualified plan distributions will be subjected : Which of the following qualified plan distributions will be subjected to a 10% early withdrawal penalty?

Explain the significance of various economic theories : Explain the significance and implications of various economic theories pertaining to profit, consumer choice, demand and supply, forecasting and optimization

Do a competitive strength assessment for your company : Do a competitive strength assessment for your company and two other companies that you and your co-managers consider to be very close competitors.

Write a program that implements a recursive algorithm : A Sierpinski Triangle is a fractal formed by drawing a triangle, and then using the midpoints of each side of triangle to form another triangle.

What is estimated internal rate of return of the project : What is the estimated Internal Rate of Return (IRR) of the project? What is the project NPV?

What was the primary cause of the loss in net income : Based on the static budget report: What was the primary cause(s) of the loss in net income

Does advance life support improve patient outcome : Does Advance life support improve patient outcome? What you do after you have selected an approved topic and have done your research.

A decision in favor of sidley austin brown and wood : What about a decision in favor of Sidley Austin Brown and Wood? What will this mean for older employees?

Design a graphic version of the towers of hanoi puzzle : Design and implement a graphic version of the Towers of Hanoi puzzle. Allow the user to set the number of disks used in the puzzle.

User Account

All Pages