📊 Capital Budgeting: Beverage Kiosk Startup

Project: Beverage Kiosk Evaluation

Initial Equipment Cost: $100,000
Installation Cost: $10,000
Increase in Inventory (Working Capital): $8,000
Increase in Accounts Payable: $3,000
Project Life: 4 years
Salvage Value at Year 4: $15,000
Tax Rate: 30%
Discount Rate (WACC): 10%
Depreciation: Straight-line over 4 years, no salvage for depreciation
Annual Revenue: $85,000
Annual Operating Costs (excluding depreciation): $45,000

Q1. What is the initial investment outlay for the project?

Solution:
Initial Outlay = Equipment + Installation + Net Working Capital Increase
Net Working Capital Increase = Inventory - Accounts Payable = 8,000 - 3,000 = 5,000
Total = 100,000 + 10,000 + 5,000 = $115,000

Q2. What is the annual depreciation expense?

Solution:
Depreciable Base = Equipment + Installation = 100,000 + 10,000 = 110,000
Depreciation = 110,000 / 4 = $27,500 per year

Q3. What is the Year 1 operating cash flow (OCF)?

Solution:
EBIT = Revenue - Operating Costs - Depreciation = 85,000 - 45,000 - 27,500 = 12,500
Taxes = 12,500 × 30% = 3,750
OCF = EBIT + Depreciation - Taxes = 12,500 + 27,500 - 3,750 = $36,250

Q4. What are the terminal year cash flows, and how are they calculated?

Solution:
After-tax Salvage = $15,000 × (1 - 0.30) = 10,500
Recovery of Working Capital = $5,000
Terminal Year CF = OCF + After-tax Salvage + WC Recovery = 36,250 + 10,500 + 5,000 = $51,750

Q5. What is the Net Present Value (NPV) of the project?

Solution:
NPV = - Initial Outlay + Present Value of Cash Flows

Initial Outlay = $115,000

Annual OCF = $36,250 (Years 1–3)
Year 4 Cash Flow = OCF + Terminal Value = $36,250 + $15,500 = $51,750

Discount Rate = 10%

NPV Formula:
NPV = -115,000 + (36,250 / 1.10) + (36,250 / 1.10²) + (36,250 / 1.10³) + (51,750 / 1.10⁴)

NPV = -115,000 + 32,954.55 + 29,958.68 + 27,234.26 + 35,332.25

NPV = $10,479.74

Q6. Final Decision?

Decision:
Since NPV is positive ($10,432.88), the project should be accepted.