In Module 2, you will take your income statements and start to construct a cash flow that will also extend into Week 3. For the most part, cash flows are pretty straight forward. If you’re going to experience trouble, it almost always happens with working capital. Remember that once you’ve calculated the Total Working Capital for Year 0, all future Working Capital needs will be incremental. Almost all of the variables will be provided to you here.
Using the income statement from the previous exercise, forecast a ten year cash flow using the following assumptions:
- Capital Expenditures of $50,000 per year.
- Leasehold Improvements of $10,000 per year.
- DSO of 75 Days.
- Inventory Turnover of 12 times.
- Accounts Payable of 30 days.
- Depreciation is constant.
- The combined Federal and State Tax Rate is 40%.
- There are no additional financing expenses associated with the transaction.
After you have completed your cash flow forecast, calculate a Net Present Value assuming a discount rate of 15%.