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Ma & Pa Incorporated Expense Estimates (FIN_300)

Please note: The data below is based on Andres original request of examination of an eight year project. You will use these numbers to answer a. thru e. on the Ma & Pa Worksheet.

I. Up-front costs: Andre Russell worked with the top management (Bill, Lucy, Lilian, and Hillary) as well as selected middle manager to arrive at the up-front costs. Based on his discussions with them, he is anticipating the up-front costs to be comprised of the following:

• Cost of the land: He anticipates that the land will cost about $40,000 per acre and he needs about 5 acres ($200,000 in total).
• Cost of the building: $1,000,000
• Equipment: $250,000
• Furniture: $200,000
• IT infrastructure: $550,000
• Total projected up-front costs: $2,200,000

II. Cost of capital: Andre researched extensively on cost of capital and found:

• Total projected cost of capital: $195,000

III. Sales: After working with Elizabeth Brown, Director of Sales and Marketing, and several other managers in her area, Andre is projecting the following sales for the first year. Further, these sales are expected to grow at 10% compounded for the duration of the project.

• Electronic toys for children: $175,000
• Halloween toys: $320,000
• Christmas toys: $430,000
• Total projected sales: $925,000

IV. Cash expenses: Based on the past expenses and projections for future expenses, Andre arrived at the following expenses on an annual basis. For simplicity, Andre assumed that these expenses will grow at 2% annually for the duration of the project.

• Labor/Employment Expenses: $87,500
• Maintenance: $77,500
• New equipment: $75,000
• IT budget: $70,000
• Total projected cash expense: $310,000

V. Depreciation: Andre is expecting that the depreciation will computed as follows:

• Land value depreciation: $70,000
• Building value depreciation: $65,000
• Equipment depreciation: $60,000
• IT infrastructure depreciation $55,000
• Total projected depreciation: $250,000

Question 1) Use the eight year model, along with Andres estimates for questions a. thru e.

1. At the end of the project, what is Ma & Pa Incorporateds earnings before taxes then? __________. At the current tax rate for Ma & Pa incorporated, what is Ma & Pa Incorporateds net income?

2. Compute the projects after-tax cash flow.

Operating cash flow = (Sales Costs Depreciation) (1 t) + Depreciation change in net working capital

3. Compute and interpret the projects NPV, IRR, and profitability index.

4. According to your above calculations: What is your interpretation on if the project should be accepted or rejected?

5. The minimum required rate of return is a weighted average of the firms costs of various sources of capital. Explain.

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