Teresa’s Tanning Salon expects annual sales of $175,000, annual fixed cash outla

Question

Teresa’s 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 work by hand and in excel showing formulas for both.

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 the“what 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

Year cash flow PVAF(10%,10year) present value

0 -140000 1 -140000

1-10 -76000 6.145 -467020

1-10 48320 6.145 296926

10 100000 0.386 38600

Net present value =present value of cash inflow - present value of cash outflow

= ($296926+ $38600) - ($140000+ 467020)

= 335526-607020

= -$271494

Note:- cash inflow per year :

   Sales $175000

Less: Fixed cost $76000

less: variable cost(20%*$175000) $35000

Less: Depreciation $15000

Earning before tax $49000

less: Tax $15680

Earning After tax $33320

Add: Depreciation $15000

cash flow per year $48320

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