Teresas Tanning Salon expects annual sales of $175,000, annual fixed cash outlay
ID: 2625635 • Letter: T
Question
Teresas Tanning Salon expects annual sales of $175,000, annual fixed cash outlays are $76,000 a year at each location, variable cash outlays are 20 percent of sales, depreciation is $15,000 per year, and taxes are 32% (of pretax income). Initial outlay for the building is $140,000. The company does its analysis based on a 10-year store life. We believe the business can be sold for $100,000 after taxes (disposal value) at the end of its 10 year lifer. Using an 10% required return, what is the net present value of this venture?
Please rework the prior problem to determine what annual sales volume is needed to generate a net present value of $0? To do this you will need to review the problem in the book and its excel answer. If you do not know how to do a goal seek in excel please consult the help menu or google or other sources (there are many). Remember -- you will need to calculate the net present value in the traditional way first. When you do this you need to make sure that the second year sales references the first year ( plus first year in the formula) You will then need to click on the data tab to access thewhat if box and then click on the goal seek box. To use this function, you will set the npv cell to zero by changing the sales cell in the first year.
Explanation / Answer
Initial Investment = $ 140000
Annual Cash Flow = (Annual Sale - Variable Cost -Fixed Cash Outlay)*(1-tax rate) + Depreciation* Tax Rate
Annual Cash Flow = (175000-20%*175000-76000)*(1-0.32) + 15000*0.32
Annual Cash Flow (PMT) = $ 48,320
Terminal Value (FV) = $100,000
Discount rate (rate) = 10%
Time (nper) = 4 Year
Present Value of Cash Inflow = pv(rate,nper,pmt,fv)
Present Value of Cash Inflow = pv(10%,10,48320,100000)
Present Value of Cash Inflow = $ 335,459.81
Net present value = Present Value of Cash Inflow - Initial Investment
Net present value = 335,459.81 - 140000
Net present value = $ 195,459.81
Please rework the prior problem to determine what annual sales volume is needed to generate a net present value of $0?
Net present value = 0
i.e, Present Value of Cash Inflow = Initial Investment
Present Value of Cash Inflow = 140000
We have to calculate Annual Cash flow:
Annual Cash flow = pmt(rate,nper,pv,fv)
Annual Cash flow = pmt(10%,10,-140000,100000)
Annual Cash flow = $ 16509.82
Annual Cash Flow = (Annual Sale - Variable Cost -Fixed Cash Outlay)*(1-tax rate) + Depreciation* Tax Rate
Let Annaul Sale be x
16509.82 = (x-0.2x-76000)*(1-0.32) + 15000*0.32
(0.8x-76000)*0.68 = 16509.82 - 4800
0.8x - 76000 = 11709.82/0.68
0.8x = 17220.32 + 76000
x = 93220.32/0.8
x = $ 116,525.40
Annual Sale Volume: $ 116,525.40
Answer:
Net present value = $ 195,459.81
Annual Sale Volume= $ 116,525.40
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