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?

Answer 1

YEAR		1	2	3	4	5	6	7	8	9	10	11	12	12
INITIAL INVESTMENT
BUILDING	12,00,000
EQUIPMENT	2,50,000
CASH FLOW PER WEEK
REVENUE		42300	42300	42300	42300	42300	42300	42300	42300	42300	42300	42300	42300
CASH EXPENSES		18000	18000	18000	18000	18000	18000	18000	18000	18000	18000	18000	18000
PROFIT BEFORE TAXES AND DEPRICIATION		24300	24300	24300	24300	24300	24300	24300	24300	24300	24300	24300	24300
PROFIT FOR THE YEAR BEFORE DEP AND TAX		1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000
DEPRICIATION
BUILDING		31000	31000	31000	31000	31000	31000	31000	31000	31000	31000	31000	31000
EQUIPMENT		20000	20000	20000	20000	20000	20000	20000	20000	20000	20000	20000	20000
PROFIT BEFORE TAX		1164000	1164000	1164000	1164000	1164000	1164000	1164000	1164000	1164000	1164000	1164000	1164000
TAX		283500	283500	283500	283500	283500	283500	296000	296000	296000	296000	296000	296000
PAT		880500	880500	880500	880500	880500	880500	868000	868000	868000	868000	868000	868000
CASH FLOW		931500	931500	931500	931500	931500	931500	919000	919000	919000	919000	919000	919000	6,00,000
PRESENT VALUE	9%	854587.156	784024.914	719288.912	659898.084	605411.086	555423.015	502724.471	461215.111	423133.129	388195.532	356142.689	326736.412	213320.835
NET PRESENT VALUE	54,00,101
CALCULATION OF TAX
PROFIT FOR THE YEAR BEFORE DEP AND TAX		1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000	1215000
DEPRICIATION FOR BUILDING		31000	31000	31000	31000	31000	31000	31000	31000	31000	31000	31000	31000
DEPRICIATION FOR EQUIPMENT		50000	50000	50000	50000	50000	50000	0	0	0	0	0	0
PBT		1134000	1134000	1134000	1134000	1134000	1134000	1184000	1184000	1184000	1184000	1184000	1184000
TAX		283500	283500	283500	283500	283500	283500	296000	296000	296000	296000	296000	296000

TAXES ARE CALCULATED SEPARATELY BECAUSE EQUIPMENT HAS A TAX LIFE OF 5 YEARS SO WE WILL HAVE TO TAKE DEPRICIATION FOR EQUIPMENT ACCORDINGLY.