FIN 3113 Food Truck Project Cash Flow Mini Case Recently, Austin Hansen was laid off from...

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FIN 3113 Food Truck Project Cash Flow Mini Case
Recently, Austin Hansen was laid off from his job of 25 years.He and his wife, Anne, decided
to purchase and operate a food truck, serving burgers, fries,and soft drinks near OSU campus.
They decided the call their food truck, Hungry HansenHamburgers!
The Hansens were able to find a truck that costs $60,000.However, the truck will require an
additional $20,000 for the wrap and equipment. The truck has anexpected life of six years and
will be depreciated using a five-year MACRS life. The expectedsalvage value for the truck at
the end of its useful life is $20,000. Additionally, the Hansenswill need to make an initial
investment of $2,000 for product inventory (e.g., meat,hamburger buns, etc.), which will be
recovered at the end of the life of the project.
During the first year of operation, revenues are expected to be$60,000, increasing to $120,000
per year for years 2-6. Permits and licenses are expected to be$500 per year. Fuel and power
are expected to be $300 per month and the cost of materials isexpected to be 40% of revenue.
The tax rate is 25% and the cost of capital (discount rate) is15%.
Calculate the project’s annual free cash flows over the expectedlife of the equipment.

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Transcribed Image Text

FIN 3113 Food Truck Project Cash Flow Mini CaseRecently, Austin Hansen was laid off from his job of 25 years.He and his wife, Anne, decidedto purchase and operate a food truck, serving burgers, fries,and soft drinks near OSU campus.They decided the call their food truck, Hungry HansenHamburgers!The Hansens were able to find a truck that costs $60,000.However, the truck will require anadditional $20,000 for the wrap and equipment. The truck has anexpected life of six years andwill be depreciated using a five-year MACRS life. The expectedsalvage value for the truck atthe end of its useful life is $20,000. Additionally, the Hansenswill need to make an initialinvestment of $2,000 for product inventory (e.g., meat,hamburger buns, etc.), which will berecovered at the end of the life of the project.During the first year of operation, revenues are expected to be$60,000, increasing to $120,000per year for years 2-6. Permits and licenses are expected to be$500 per year. Fuel and powerare expected to be $300 per month and the cost of materials isexpected to be 40% of revenue.The tax rate is 25% and the cost of capital (discount rate) is15%.Calculate the project’s annual free cash flows over the expectedlife of the equipment.