You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish tocomplete a cash flow statement to be used for capital budgeting purposes. You will have topurchase $80,000 of equipment with cash you have saved to manufacture the doughnuts.You will purchase the equipment on the day you start the business. You will depreciate theequipment using 3-year straight-line depreciation to a salvage value of $20,000.You will need to have $20,000 of inventory and you will need to have $5,000 in cash for thecash registers. You will need to have the inventory and cash in place the day you start thebusiness and it will remain in place throughout the life of the business. You will owe yoursuppliers $5,000 at all times, beginning the day that you start the business and continuingthrough the life of the business.Based on your sales estimate, you believe that you will be able to sell $1,000,000 ofdoughnuts per year. You have estimated labor costs to be $200,000 for the year and it willcost $100,000 per year to rent the space in the Mall (rent and labor will be paid at the endof the year). The cost of the ingredients to make the doughnuts will be $250,000 per year.Assume all operating expenses and all operating income are paid and received at the endof each respective year. You have organized your company as a sole proprietorship, so youwill pay 20 percent taxes on the earnings of the firm.You are planning to quit the business at the end of the third year, at which time you will sellthe equipment for $50,000. When you close the business, you will recover the inventory,cash register cash, and pay off your accounts payable. For capital budgeting purposes,what are the operating cash flows for year 1 of the company? Provide only the operatingcash flows and supporting calculations for this question! Note that you shouldprovide the cash flows only for year 1. Other questions will ask you to produce theother cash flows.

Answered: Image /qna-images/answer/82a8af87-948c-4c6f-b567-98ffa0574fda.jpg

cash you have saved to manufacture the dou ase the equipment on the day you start the business. You will deprec ng 3-year straight-line depreciation to a salvage value of $20,000. co have $20,000 of inventory and you will need to have $5,000 in cash You will need to have the inventory and cash in place the day you sta t will remain in place throughout the life of the business. You will owe D0 at all times, beginning the day

cash you have saved to manufacture the dou ase the equipment on the day you start the business. You will deprec ng 3-year straight-line depreciation to a salvage value of $20,000. co have $20,000 of inventory and you will need to have $5,000 in cash You will need to have the inventory and cash in place the day you sta t will remain in place throughout the life of the business. You will owe D0 at all times, beginning the day

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to
complete a cash flow statement to be used for capital budgeting purposes. You will have to
purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts.
You will purchase the equipment on the day you start the business. You will depreciate the
equipment using 3-year straight-line depreciation to a salvage value of $20,000.
You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the
cash registers. You will need to have the inventory and cash in place the day you start the
business and it will remain in place throughout the life of the business. You will owe your
suppliers $5,000 at all times, beginning the day that you start the business and continuing
through the life of the business.
Based on your sales estimate, you believe that you will be able to sell $1,000,000 of
doughnuts per year. You have estimated labor costs to be $200,000 for the year and it will
cost $100,000 per year to rent the space in the Mall (rent and labor will be paid at the end
of the year). The cost of the ingredients to make the doughnuts will be $250,000 per year.
Assume all operating expenses and all operating income are paid and received at the end
of each respective year. You have organized your company as a sole proprietorship, so you
will pay 20 percent taxes on the earnings of the firm.
You are planning to quit the business at the end of the third year, at which time you will sell
the equipment for $50,000. When you close the business, you will recover the inventory,
cash register cash, and pay off your accounts payable. For capital budgeting purposes,
what are the operating cash flows for year 1 of the company? Provide only the operating
cash flows and supporting calculations for this question! Note that you should
provide the cash flows only for year 1. Other questions will ask you to produce the
other cash flows.

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