Question

Net Present Value Analysis
You have an opportunity to invest in a concession at a world exposition. To use the building and exhibits more fully, the venture is expected to cover a six-year period consisting of a preliminary year, the two years of formal exposition, and a three-year period of reduced operation as a regional exposition.
The terms of the concession agreement specify the following:
1. At inception, a $40,000 deposit is paid to Global Expo, Inc., the promoting organization. This amount is returned in full at the end of the six years if the operator maintains the concession in order and keeps it open during scheduled hours. The deposit is not tax deductible, nor is its return subject to income taxes.

2. The operator must install certain fixtures that will cost $220,000. The fixtures become the property of Global Expo, Inc., at the end of the six years.

After careful investigation and consultation with local experts, you conclude that the following schedule reflects the estimated pre-tax income of the concession (amounts in thousands of dollars):   

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Sales (all cash)	$140	$425	$478	$290	$230	$170
Operating expenses
Cash	75	228	279	170	140	106
Tax depreciation	48	77	46	28	28	13
Total expenses	123	305	325	198	168	119
Pre-tax income	17	120	153	92	62	51

Assuming an income tax rate of 40% and a desired annual return of 9%, what is the net present value of this investment opportunity?

Round answers to the nearest whole number. Use rounded answers for subsequent calculations.
Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers.

Enter answers below using complete numbers. Do not enter answers in thousands as shown above in the exhibit.   For example, Year 1 Sales figure above shows as $140. The number would be entered below as $140,000.

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cash sales	Answer	Answer	Answer	Answer	Answer	Answer
Operating expenses	Answer	Answer	Answer	Answer	Answer	Answer
Income taxes	Answer	Answer	Answer	Answer	Answer	Answer
Total cash outflows	Answer	Answer	Answer	Answer	Answer	Answer
After-tax cash inflows	Answer	Answer	Answer	Answer	Answer	Answer
Present value	Answer	Answer	Answer	Answer	Answer	Answer
Present value of net after-tax operating cash inflows				Answer
Return of deposit in 6 years				Answer
Total present value of future cash flows				Answer
Investment required				Answer
Net positive (negative) present value				Answer

What is the maximum amount that could be invested and still earning a 9% annual return?

Answer

Answer 1

				Year	PV factor @ 9%	Present Value
Cost of the Project			(220000$)	0	1	-220000
Deposit Non Deductible			(40000 $)	0	1	-40000
After Tax Cash Inflow			58200$	1	0.917	53369
After Tax Cash Inflow			149000$	2	0.841	125309
After Tax Cash Inflow			137800$	3	0.772	106382
After Tax Cash Inflow			83200$	4	0.708	58906
After Tax Cash Inflow			65200$	5	0.649	42315
After Tax Cash Inflow			43600$	6	0.596	25986
Deposit Inflow			40000$	6	0.596	23840
			NPV of Cash Inflow - NPV of Cash Outflow	176106
	Sale	Operating Expenses	Depreciation	Earning Before Tax	Tax Expenses	After Tax Cash Inflows
Year 1	140000	75000	48000	17000	6800	58200
Year 2	425000	228000	77000	120000	48000	149000
Year 3	478000	279000	46000	153000	61200	137800
Year 4	290000	170000	28000	92000	36800	83200
Year 5	230000	140000	28000	62000	24800	65200
Year 6	170000	106000	13000	51000	20400	43600
Tax Rate is 40%
PV factor @ 9%

(ii) For Making investment to earn 9% Annual Interest, As earning will not change with the change in investmet. MAximum investment can be made is to the extent of 220000$+ 176106$ = 396106$. Deposit amount will remain same.