Location: Los Angeles, CA
The attached spreadsheet model is for the Original Yummy Cupcakes store located in Los Angeles, CA listed for $850,000. The model includes a balance sheet and income statement forecasted for ten years with reasonable assumptions for the current growth and location of the store. It also forecasts the free cash flows, cost of capital and internal rate of return. Included in the spreadsheet is a computed expected net present value of the company in good, medium, and poor markets and their separate forecasts in each situation. The model lays out assumptions and variables for each category so that it can be easily changed and computed with different values.
In the model with the input values chosen, the cupcake store would have a weighted average cost of capital (WACC) equal to 4.02%, with an internal rate of return equal to 6.15%. We tried to adjust the cost of capital by changing the debt and equity proportions, but were not able to get any proportions acceptable enough to allow the cost to be close to the 6.15% return.
We decided that the $850,000 listed price can be lowered to at least $700,000. We still think this is a good investment and purchasing the cupcake store would be a good business decision.