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