You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to complete a cash flow statement to be used for capital budgeting purposes. You will have to purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts. You will purchase the equipment on the day you start the business. You will depreciate the equipment using 3-year straight-line depreciation to a salvage value of $20,000. You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the cash registers. You will need to have the inventory and cash in place the day you start the business and it will remain in place throughout the life of the business. You will owe your suppliers $5,000 at all times, beginning the day that you start the business and continuing through the life of the business. Based on your sales estimate, you believe that you will be able to sell $1,000,000 of doughnuts per year. You have estimated labor costs to be $200,000 for the year and it will cost $100,000 per year to rent the space in the Mall (rent and labor will be paid at the end of the year). The cost of the ingredients to makeſthe doughnuts will be $250,000 per year. Assume all operating expenses and all operating income are paid and received at the end of each respective year. You have organized your company as a sole proprietorship, so you will pay 20 percent taxes on the earnings of the firm. You are planning to quit the business at the end of the third year, at which time you will sell the equipment for $50,000. When you close the business, you will recover the inventory, cash register cash, and pay off your accounts payable. For capital budgeting purposes, what is the net cost (initial cash flow) of starting the company? (That is, what is the Year 0 (or initial) cash flow?) Provide only the initial cash flows and supporting calculations for the question! Other questions will ask you to produce the other cash flows.
You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to complete a cash flow statement to be used for capital budgeting purposes. You will have to purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts. You will purchase the equipment on the day you start the business. You will depreciate the equipment using 3-year straight-line depreciation to a salvage value of $20,000. You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the cash registers. You will need to have the inventory and cash in place the day you start the business and it will remain in place throughout the life of the business. You will owe your suppliers $5,000 at all times, beginning the day that you start the business and continuing through the life of the business. Based on your sales estimate, you believe that you will be able to sell $1,000,000 of doughnuts per year. You have estimated labor costs to be $200,000 for the year and it will cost $100,000 per year to rent the space in the Mall (rent and labor will be paid at the end of the year). The cost of the ingredients to makeſthe doughnuts will be $250,000 per year. Assume all operating expenses and all operating income are paid and received at the end of each respective year. You have organized your company as a sole proprietorship, so you will pay 20 percent taxes on the earnings of the firm. You are planning to quit the business at the end of the third year, at which time you will sell the equipment for $50,000. When you close the business, you will recover the inventory, cash register cash, and pay off your accounts payable. For capital budgeting purposes, what is the net cost (initial cash flow) of starting the company? (That is, what is the Year 0 (or initial) cash flow?) Provide only the initial cash flows and supporting calculations for the question! Other questions will ask you to produce the other cash flows.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter17: Long-term Investment Analysis
Section: Chapter Questions
Problem 2E
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Transcribed Image Text:You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to
complete a cash flow statement to be used for capital budgeting purposes. You will have to
purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts.
You will purchase the equipment on the day you start the business. You will depreciate the
equipment using 3-year straight-line depreciation to a salvage value of $20,000.
You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the
cash registers. You will need to have the inventory and cash in place the day you start the
business and it will remain in place throughout the life of the business. You will owe your
suppliers $5,000 at all times, beginning the day that you start the business and continuing
through the life of the business.
Based on your sales estimate, you believe that you will be able to sell $1,000,000 of
doughnuts per year. You have estimated labor costs to be $200,000 for the year and it will
cost $100,000 per year to rent the space in the Mall (rent and labor will be paid at the end
of the year). The cost of the ingredients to makeſthe doughnuts will be $250,000 per year.
Assume all operating expenses and all operating income are paid and received at the end
of each respective year. You have organized your company as a sole proprietorship, so you
will pay 20 percent taxes on the earnings of the firm.
You are planning to quit the business at the end of the third year, at which time you will sell
the equipment for $50,000. When you close the business, you will recover the inventory,
cash register cash, and pay off your accounts payable. For capital budgeting purposes,
what is the net cost (initial cash flow) of starting the company? (That is, what is the Year 0
(or initial) cash flow?) Provide only the initial cash flows and supporting calculations
for the question! Other questions will ask you to produce the other cash flows.
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