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 $60,000 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 foxtures that will cost $240.000. 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 Operating expenses 75 $150 $43S $488 $300 $240 $180 Cash 228 279 170 140 106 Tax depreciation Total expenses 48 77 46 28 28 13 123 305 325 198 168 119 Pre-tax income 27 130 163 102 72 61 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 firure ahove shows a
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 $60,000 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 foxtures that will cost $240.000. 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 Operating expenses 75 $150 $43S $488 $300 $240 $180 Cash 228 279 170 140 106 Tax depreciation Total expenses 48 77 46 28 28 13 123 305 325 198 168 119 Pre-tax income 27 130 163 102 72 61 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 firure ahove shows a
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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
$150. The number would be entered below as $150,000.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Cash sales
Operating expenses
Income taves
Total cash outflows
Ahter-tax cash inflows
Present value
Present value of net after cax operating cash inflows
Return of deposit in 6 years
Total present value of tuture cash flows
Investment required
Net positive (negative) present value
What is the maximum amount that could be invested and still earning a 9% annual return?
Transcribed Image Text: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 $60,000 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 foxtures that will cost $240.000. 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 refiects 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)
$150
$488 1300 $240 $180
$435
Operating expenses
Cash
75
228
279
170
140
106
Taw depreciation
48
77
46
28
28
13
Total
expenses
123
305
325
198
168
119
Pre-tax income
27
130
163
102
72
61
Assuming an income tax rate of 406 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
$150. The number would be entered below as $150,000.
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