Question

Colina is considering opening a mezcal and tequila bar in Laredo after the coronavirus pandemic subsides. She knows that about $2.3 million is collected in mized beverage alcohol taxes per year in Webb county (at a rate of 6.7% of the gross sale)and she believes her bar could get about 1.4% of the liquor sales in the county. Her variable costs likely to be 19% of her sales. She plans to hire 2 full-time bartenders at $13/hour (assume 2000 working hours per year)and a bar manager with a salary of 65,000/ plus 4.5 % of revenue. Finally , she expects $25,000 /year expenses

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Celina needs 200,000 to buy land in the location she wants, and $210,00 to build the bar and purchase equipment,furniture,etc. She will use straight libe depreciation over a 15 year period. She faces a tax rate of 20%. She will need to hold an additional $25,000 in net working capital from the start of the project, which will be freed at the end. Assume the bar will close after 15 years.

In order to finance a new store, she will borrow $235,000 from local bank, which will be paid off over fifteen years with equal monthly payments of $1700. The rest of her initial capital requirements will come from her savings. She estimates that her equity will be 2.25 times as risky as investing in publicly traded stocks, which an expected return of 9.75%. The risk free rate is assumed to be 1.40%.

Enter answers below; numbers should be rounded to two decimal places:

The operating cash flow( in thousands) for the project:_____

The discount rate used:_______

The value of the project( in thousands):______

Yes or no depending on whether the project is worth purchasing:_________

Answer 1

Operating Cash Flow is in attached images.

Disount Rate used is 9.75%

The value of the project is $1,251 thousands

Yes, The project should be accepted