Question

You are thinking of opening an internet coffee shop and estimate the following cash flows. The cost of the establishment is $1.200,000 for the building and $250,000 for equipment (tax life of 5 years) and both are placed it into service on June 1. The business will earn $42,300 per week in revenue and have cash expenses of $18,000 per week during its twelve years of operation. Assume a 50-week year. The building will be depreciated at $31,000 per year and the equipment will be depreciated at $20,000 per year. The business will be sold for an after-tax cash disposition value of $600,000 at the end of the 12th year. No other cash flows will occur during the 12 years of operation. Using a 25 percent tax rate, and a 9 percent cost of money, what is the net present value of this business? Present value of future operating profits______________________

Answer 1

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The question is testing the concept of the NPV. It involves complex calculation and one important point of tax life of equipment.

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