Business Finance

Business Finance Student's Name University Course Professor Date Business Finance Case 1: 1 Cash Flows to be Considered in the Capital Budgeting Evaluations The cash flows to be considered include initial investment, operating cash flows, opportunity costs, externalities, and terminal value. * Initial Investment: It is calculated that Mark will spend $200000 on decoration and equipment and $35000 in inventory. This makes the total initial investment to be $ 235,000. Also, accounts payable increased by $10,000, affecting working capital needs in the company's financial management. * Operating Cash Flows: This report will show the restaurant's annual revenues under the preparation of the income statement; afterwards, the fixed and variable costs have to be deducted to calculate EBIT. There will be an allowance for depreciation expenses, and taxes will be computed from the EBIT. * Opportunity Costs: He is forgoing a $45,000 annual rental by using the space for the restaurant instead of renting it out to others. * Externalities: The new restaurant will cut $21,000 of annual revenue from its current restaurant. * Terminal Value: At the end of 10 years, Mark wishes to dispose of the equipment at $ 60,000 to recover his working capital of $ 35,000. 2 Should Mark Open the New Restaurant? Assessing whether Mark should open the new restaurant is required to calculate the Net Present Value (NPV) for the project step by step, based on the given financial data. Calculating the NPV requires adjusted operating income and terminal value. These elements are derived from calculations involving revenue, variable costs, fixed costs, depreciation, EBIT, taxes, and opportunity costs for operating income. When NPV is obtained, if it is positive, the business should be opened and vice versa. * Revenue: 15, 500 x $25 each, $387,500 annually. * Variable Costs: The cost-plus pricing approach concluded that variable costs should amount to 25% of the overall revenue, which equals 96,875 US dollars per year. * Fixed Costs: About 120,000 US dollars per year in fixed operating expenses. * Depreciation: The consumption charge method is $20,000 annually for 10 years based on the amount spent on decoration and equipment. * EBIT Calculation: * EBIT=Revenue−Variable Costs−Fixed Costs−Depreciation * =387,500−96,875−100,000−20,000=170,625 * Taxes: * Taxes=EBIT×30%=170,625×0. 30=51,188 * Operating Income After Tax: * Operating Income: * Operating Income=170,625−51,188=119,438 * Adjusting for Opportunity Costs and Cannibalization: * Adjusted Operating Income=119,438−66,000=53,438 * ($66,000 equals the $45,000 lost rent from the space and $21,000 of sales from the current restaurant that would have been generated if the restaurant remained open for the year.) * * Terminal Value: The terminal value comprises the equipment's salvage value, $60,000, and the recovery of working capital, $35,000, totalling $95,000. NPV Calculation: Using the discount rate of 11.5% and assuming cash flows are for 10 years, the formula for NPV is: NPV= t-110Adjusted operating income (1+r)t+ Terminal value(1+r)10-initial investment Where; r=11.5%=0.115 Adjusted Operating Income=53,438 Initial Investment=235,000 Terminal Value=95,000 Adjusted operating income (1+r)t = 53,438 (1+0.115)1 …….. 53,438 (1+0.115)1...