Answer both otherwise not 2. The additional dining space will occupy space next to Olaf’s that...

Answer both otherwise not

2. The additional dining space will occupy space next to Olaf’s that was recently rented to a tenant. By claiming the space for the project, the firm will no longer be able to rent the space at $1,000 per month. Kristoff wants to evaluate this project over a four year time period. The after-tax operating profit margin on the renting the space is 30%. If Kristoff wants a 9% APR on Olaf cash flows, what is the present value of this opportunity cost? (rent is paid as the beginning of the month)

3.

Olaf’s Pizza Company is considering adding more dining space to its already successful restaurant. The owner, Kristoff, has determined that the new dining space will add $100,000 per year in additional sales. The expenses on the expansion will be 45% of the new sales. As part of the expansion, additional cooking equipment will be purchased with an installed cost of $30,000. The equipment will be depreciated using a 7-year MACRS schedule. The tax rate facing the firm is 35%

What is the project cash flow for year 1 of the project?

Expert Solution

2

Particulars	Amount
Profit payment for 4 yrs	300.00
× PVAF	40.48617
PV of lease payments at time 0	12,145.85

Opportunity cost is 12,145.85

3

Particulars	Amount	Cash flow
Revenue	100,000	100,000
Less: costs	(45,000)	(45,000)
Depreciation 30,000 * 14.29%	(4,287)
Income before tax	50,713
Less: tax@35%	(17,750)	(17,750)
Net income	32,963
Cash flow for the year		37,250

Year 1 cash flow is $37,250

jeff jeffy answered 1 year ago

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Answer both otherwise not 2. The additional dining space will occupy space next to Olaf’s that...

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