You are starting a water filter manufacturing business and need to borrow the start-up funds. To convince a venture capitalist that this business will be profitable, you are asked to develop 1) an operating income statement and 2) a cash flow statement for the next 7-years. What is the Annual Equivalent for the project? Show your results for using your own money versus borrowing.
Assume the following information applies:
•7- year venture
•Assembly equipment = $2,000,000
•MACRS = 7 years
•Salvage at 7-yr = $250,000
•MARR = 10%, Wholesale filters sell for $750 each •Annual inflation is 5%•Gross revenue is expected to increase at a rate of 8% per year (includes inflation)
•Material Expense, $375/filter
•Labor, $180/filter
•Overhead = $3.50/filter
•Make 900 filters/month
•Assume 3-months accounts receivable
•Assume 2-months inventory
•Assume 2-month of raw materials on-hand
•Assume 2-month accounts payable for raw materials
Interest Calculation:
Assume principle is $2,000,000 plus working capital12% interest is compounded monthly
Determine monthly (then annual) payment (10-year loan), (the loan must be paid in full by the end of year 7).
Calculate monthly (then annual) interest payments for tax purposes
Taxes:
Use corporate tax structure Capital gains tax rate is 15% for assets held over 1-year
