Used Equipment requirements $2,000,000 After 2 years, you intend to sell the equipment for $500,000 and replace the equipment with $5,000,000 of new equipment

Cost of intital inventory and supplies $500,000

You use the $1m for the reasearch and as a partial payment toward the equipemnt. You fund the remaining equipment and working capital with a credit line. The credit line requires a 10% interestpayment everyyear, but requires no principle paymnets. You will need to extend the credt line further when you sell the oldequipment, pay down thecredit line with the proceedsand then further extene the credit line for the new equipment purchase.

1st year sales $1,200,000
Sales growth 5% for first 3 years – 2% growth years 4 & 5
Cost of goods sold – 30% of sales
Selling, general and administrative – 15% of sales
Fixed costs = $240,000 per year
Depreciation – 7 years MACRS
Tax Rate – 35%
Discount Rate – 8%

1. What is the cash flow resulting from disposal of the equipment at the end of 2 years?
2. Computer a schedule of operating cash flows forthe 5 years.
3. Compute a schedule of increamtnal cash flows for the restaurant
4. Compute the projects net present value
5. Should we accept or reject the project