Question

QuickSalad is a new concept from an existing food company that intends to sell discounted salads. It will lease its buildings and has no capital expenses or depreciation. It will qualify for a special tax rate of 10% due to its healthy food nature. It must maintain a balance of 20% of each year’s revenues in working capital at the start of each particular year. Revenues for this first year of operations are expected to be $2 million and costs are $1 million. Revenues and costs will grow at 10% each year for the years 2, 3, 4, and 5. At year five it expects to be able to sell itself to McDonalds for $15 million and if there is any taxable gain it would pay a 20% tax rate on this. A discount rate of 8% is appropriate for valuing the cash flows of QuickSalad. Should QuickSalad start its business given these projected cash flows and discount rate?

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Answer 1

Current Worth of QuickSalad Project:
($'million)
year	WC required	Rev	Cost	IBT	Tax (10%)	IAT	CASH FLOW	Dis rate 8%	PW ($ million)
0								1
1	-0.40	2.00	1.00	1.00	0.10	0.90	0.50	0.926	0.46
2	-0.44	2.20	1.10	1.10	0.11	0.99	0.95	0.857	0.81
3	-0.48	2.42	1.21	1.21	0.12	1.09	1.05	0.794	0.83
4	-0.53	2.66	1.33	1.33	0.13	1.20	1.15	0.735	0.84
5	-0.59	2.93	1.46	1.46	0.15	1.32	1.26	0.681	0.86
Salwage				15	3 (20%)	12.00	12.00	0.681	8.17
Present Worth									11.98

QuickSalad should start its business (given these projected cash flows and discount rate) as present Net Worth of business is $11.98 million.