After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L'Entrecote. You will offer a fixed menu of salad, steak and French fries. Your innovation is that you will use a bordelaise (red wine) sauce instead of a tarragon butter sauce. You plan to run the restaurant for two years and then retire. Start-up costs, to be incurred immediately, are $500,000. Start-up costs include kitchen equipment, kitchen supplies, renovations, furniture, fixtures, and the point-of-sales system.
Assume that all of those assets are classified as 5-year property. The assets can be sold for $150,000 after two years.
You expect 100 diners per night. The restaurant will be open for 300 nights per year. The average diner orders food with a menu price of $35 and beverages with a menu price of $15. Food costs are 34% of the menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef, 5 kitchen staff, a bartender, the Maitre d' and 10 wait staff). Municipal tax, rent, and utilities, are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid) at the end of each year.
The small business tax rate is 20%. The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine, beer and liquor costing $50,000. What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates
| Year | 3-Year | 5-Year |
| 1 | 33.33% | 20.00% |
| 2 | 44.45% | 32.00% |
◦ $100,000
◦ $128,600
◦ $102,880
◦ $202,880
◦ $1,271,400
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