Question

In: Finance

You are thinking of opening an internet coffee shop and estimate the following cash flows. The...

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 $38,000 per week during its twelve years of operation. Assume a 50-week year. The building and equipment 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?

Net present value______________________

Solutions

Expert Solution

annual deprecation during first 5 years = total cost of building and equipment / tax life

annual deprecation during first 5 years = ($1,200,000 + $250,000) / 5

annual deprecation during first 5 years = $290,000

Annual cash inflow (before tax) = (weekly revenue - weekly expenses) * 50

Annual cash inflow (after tax) = (Annual cash inflow (before tax) * (1 - tax rate)) + (depreciation * tax rate)

We add the depreciation tax shield because it is treated as a cash inflow

NPV is calculated using NPV function in Excel

NPV is $199,988


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