The Hot New Café - Capital budgeting

School: Academy of Massage Therapy - Hackensack           Price: \$10.00 USD

Document Description

A quaint but well-established coffee shop, the Hot New Cafe, wants to build a new cafe for increased capacity. Expected sales are \$800,000 for the first 5 years. Direct costs including labor and materials will be 50% of sales. Indirect costs are estimated at \$100,000 a year. The cost of the building for the new cafe will be a total of \$750,000, which will be depreciated straight line over the next 5 years. The firm's marginal tax rate is 37%, and its cost of capital is 12%.

For this assignment, you need to develop a capital budget. It is important to know what the cafe managers should consider within their capital budget. You must also define the key terms necessary to understand capital budgeting. In this assignment, please show all work, including formulae and calculations used to arrive at financial values. You must answer the following:

Using the information in the assignment description:
Prepare a capital budget for the Hot New Cafe with the net cash flows for this project o

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Academy of Massage Therapy - Hackensack
The Hot New Caf - Capital budgeting1) Preparation of Capital budgetInitial investment\$SalesLess: Direct costs (50% of sales)Less: Indirect costsLess: Depreciation expense*Earnings before taxLess: Tax at 37%Earnings after taxAdd: Depreciation expenseCash flows after tax\$Year 0(750.000)\$\$\$\$\$\$\$\$(750.000) \$Year 1800.000(400.000)(100.000)(150.000)150.000(55.500)94.500150.000244.500Year 2\$\$\$\$\$\$\$\$\$800.000(400.000)(100.000)(150.000)150.000(55.500)94.500150.000244.500Year 3\$\$\$\$\$\$\$\$\$800.000(400.000)(100.000)(150.000)150.000(55.500)94.500150.000244.500Year 4\$\$\$\$\$\$\$\$\$800.000(400.000)(100.000)(150.000)150.000(55.500)94.500150.000244.500*Workings: - Depreciation expenseStraight line depreciation per year = [Cost - Salvage value]/Estimated life=[\$750,000 - \$0]/5 years=\$150,000 per year2) Calcula

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