Sander is setting up a recording studio which will have an annual revenue of $80,000 and...

Sander is setting up a recording studio which will have an annual revenue of $80,000 and annual cost of $40,000. The studio will require an initial investment of $20,000. Sander’s discount rate is 10%, and income tax where he lives, is 40%. In the investment year, depreciation on all items is 50%, then 30% the following year, and 20% in the next year, which is the end of the schedule. What is the net present value after two years of recording?

$71,500
$41,000
$29,200
$49,400

Expert Solution

The correct answer is option C i.e. $29,200

Outflow
Initial Investment	20000
Tax Shield	-4000	200000.50.4
Net Outflow	16000

Calculation Of Net Inflow
	Year 1	Year 2
Annual Revenue	80000	80000
Annual Cost	-40000	-40000
Depreciation	-6000	-4000

EBIT	34000	36000

Tax @ 40%	13600	14400

Add: Depreciation	6000	4000

Cash Inflow	26400	25600

PV factor @ 10%	0.90909	0.82645

Net Cash Inflow	23,999.98	21,157.12

Total Inflow	45,157.10

Net Present Value		29,157.10
		Or 29200

ekkarill92 answered 2 years ago

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