2. Whole Foods is thinking about opening up a new, smaller location in a local m
ID: 2793394 • Letter: 2
Question
2. Whole Foods is thinking about opening up a new, smaller location in a local mall (call it "Half Foods"). Equipment and fixtures will cost them $400,000 to be depreciated on a straight-line basis over five years to S0 (they will, however, have a salvage value at the end of the store of S100,000). Net working capital will need to be increased immediately by S500,000. First year sales are expected to be S1 million, and will increase at a rate of 8% per year over the ten-year life of the store. Expenses (excluding depreciation) will start at $850,000 the first year and grow at a 7% annual rate each year thereafter. The marginal tax e for each year fr : ! assume the working capital investment can be recovered at the end of year 10)Explanation / Answer
The initial outlay = FCinv + WCinv
=400000 + 500000 = 900,000
Depreciation on SLM for 5 years to salvage value 100,000 = 400,000-100,000 / 5 = 300,000/5 = 60,000 per year
Terminal year cashflow = Salvage+WCinv - Tax*(salvage-book value)
=100,000+500,000 - 0.4*(100,000-0)
=600,000 - 40000
=560,000 (and this will be added to the final year cashflow)
Net after tax cash flows = (Sales-Cost-depreciation)*(1-tax)+depreciation
Increases at 8%
Increases at 7%
Sales-cost-depreciation*(1-tax)+depreciation
Year
Sales
Cost
Depreciation
After tax cashflow
0
-900000
1
1,000,000
850,000
60000
114000
2
1,080,000
909,500
60000
126300
3
1,166,400
973,165
60000
139941
4
1,259,712
1,041,287
60000
155055.27
5
1,360,489
1,114,177
60000
171787.4109
6
1,469,328
1,192,169
166,295
7
1,586,874
1,275,621
186,752
8
1,713,824
1,364,914
209,346
9
1,850,930
1,460,458
234,283
10
1,999,005
1,562,690
821,789
Increases at 8%
Increases at 7%
Sales-cost-depreciation*(1-tax)+depreciation
Year
Sales
Cost
Depreciation
After tax cashflow
0
-900000
1
1,000,000
850,000
60000
114000
2
1,080,000
909,500
60000
126300
3
1,166,400
973,165
60000
139941
4
1,259,712
1,041,287
60000
155055.27
5
1,360,489
1,114,177
60000
171787.4109
6
1,469,328
1,192,169
166,295
7
1,586,874
1,275,621
186,752
8
1,713,824
1,364,914
209,346
9
1,850,930
1,460,458
234,283
10
1,999,005
1,562,690
821,789
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