Question

Your firm is considering a fast-food concession at the World's Fair in College Station. The cash...

Your firm is considering a fast-food concession at the World's Fair in College Station. The cash flow pattern is somewhat unusual because you must build the stands, operate them for 2 years, and then tear the stands down at the     end of the third year to restore the sites to their original condition (the stand sits idle for one year). Your firm requires a 15% pre-tax return on capital. Your firm anticipates having a marginal tax rate of 20% for the next three years. The IRS will allow your firm to depreciate the initial cost of the investment over two years. The cost of tearing down the booth is considered a tax deductible expense. You estimate that it will cost $900,000 to build and $200,000 to tear down at the end of the third year (assume the terminal value and after-tax terminal value are zero and treat the tear-down cost as an expense at the end of the third year). Your revenues will be $850,000 and operating expenses will be $200,000 at the end of each of the first two years from operating the concession stand.

What is the after-tax Net Returns for the first and second year?

What is the present value of after-tax net returns?

Homework Answers

Answer #1
What is the after-tax Net Returns for the first and second year?
After-Tax Net Returns
First Year and Second Year
Revenues $850,000.00
Less: Operating Expenses $200,000.00
Net Operating Return $650,000.00
Marginal tax rate 20.00%
After-tax Net Returns = $650,000 x (1-.20) $520,000.00
What is the after-tax Net Returns for the third year?
Revenues $0.00
Less: Operating Expenses $200,000.00
Net Operating Return -$200,000.00
Marginal tax rate 20.00%
After-tax Net Returns = -$200,000 x (1-.20) -$160,000.00
Present value of after-tax net returns
Year After Tax Return PV @ 12% Present Value
1 $520,000.00 0.892857143 $464,285.71
2 $520,000.00 0.797193878 $414,540.82
3 -$160,000.00 0.711780248 -$113,884.84
Present value of after-tax net returns $764,941.69
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A firm is considering a project that costs $165,000 to start and generates $28,000/year in after-tax...
A firm is considering a project that costs $165,000 to start and generates $28,000/year in after-tax cash for the next 8 years. After 8 years there are no additional cash flows or salvage value. The firm uses a 15% cost of capital. Build a spreadsheet model to estimate the net present value of the project.
Your firm is considering an investment that will cost $950,000 today. The investment will produce cash...
Your firm is considering an investment that will cost $950,000 today. The investment will produce cash flows of $400,000 in year 1, $250,000 in years 2, 3 and 4, $200,000 in year 5 and $250,000 in year 6. The discount rate that your firm uses for projects of this type is 11%. What is the investment's profitability index?
Your firm is considering an investment that will cost $920,000 today. The investment will produce cash...
Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2, 3 and 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 10%. How much would the NPV change if discount rate increases to 14%?
Your firm is considering building a $590 million plant to manufacture HDTV circuitry. You expect operating...
Your firm is considering building a $590 million plant to manufacture HDTV circuitry. You expect operating profits​ (EBITDA) of $141 million per year for the next ten years. The plant will be depreciated on a​ straight-line basis over ten years​ (assuming no salvage value for tax​ purposes). After ten​ years, the plant will have a salvage value of $299 million​ (which, since it will be fully​ depreciated, is then​ taxable). The project requires $50 million in working capital at the​...
(Calculating project cash flows and? NPV)???Garcia's Truckin', Inc. is considering the purchase of a new production...
(Calculating project cash flows and? NPV)???Garcia's Truckin', Inc. is considering the purchase of a new production machine for $200,000.The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine? properly, workers would have to go through a brief training session that would cost$5,000 after tax. In? addition, it would cost 5,000 after tax to install this machine correctly. ? Also, because this machine is extremely? efficient, its...
Please answer part 1 and part 2 of this question please (multiple choices): Question 1 Part...
Please answer part 1 and part 2 of this question please (multiple choices): Question 1 Part 1 A firm reported after-tax operating income of $50 million in the most recent year on capital invested of $400 million. The firm expects operating income to grow 5% a year for the next three years, and 3% thereafter. If the firm's cost of capital is 10% and you expect the firm's current return on capital to continue in perpetuity. Estimate the value (in...
Your firm is considering leasing a new computer. The lease lasts for 8 years. The lease...
Your firm is considering leasing a new computer. The lease lasts for 8 years. The lease calls for 8 payments of $8,000 per year with the first payment occurring immediately. The computer would cost $50,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 5%. The corporate tax rate is 34%. What is the after-tax cash...
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5...
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 5 payments of $300,000 per year. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the after-tax cash flow from leasing (relative to purchasing) in year 0? What is the...
Your firm is considering producing a new variety of widget. You have already test marketed the...
Your firm is considering producing a new variety of widget. You have already test marketed the widgets at a cost of $90,000. You estimate sales will be $500,000 in the first year, $800,000 in the second year, $500,000 in the third year, and zero after three years. To produce the new widgets will require an investment in working capital at year 0 of $50,000. Net working capital will be 20% of sales in years 1 and 2. Labor, materials, and...
A firm is considering a replacement project which requires the initial outlay of $300,000 which includes...
A firm is considering a replacement project which requires the initial outlay of $300,000 which includes both an after-tax salvage from the old asset of $12,000 and an additional working capital investment of $8,000. The 12-year project is expected to generate annual incremental cash flows of $54,000 and have an expected terminal value at the end of the project of $20,000. The cost of capital is 15 percent, and its marginal tax rate is 40 percent. Calculate the net present...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT