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 $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______________________

Answer 1

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